Sivaji Razdan

Material nonpublic information is data relating to a company that has not been made public but could have an impact on its share price. It is against the law for holders of nonpublic material information to use the information to their advantage in trading stocks. It is also illegal to share this information with others who use it to profit in the market.

It does not matter how the material nonpublic information was received or if the person is employed by the company. For example, suppose someone learns about nonpublic material information from a family member and shares it with a friend. If the friend uses this insider information to profit in the stock market, then all three of the people involved could be prosecuted.

Learning before the public that a company's expected earnings per share (EPS) for a given quarter could be markedly weaker than expected would be material nonpublic information. Getting information about developments in an ongoing lawsuit involving a company is another example.

Materiality is also an essential part of the definition of material nonpublic information. The nonpublic information must be significant enough to change the price of a company's stock. If a checkout clerk working for a large company learns that their hours are going to be reduced next month, that is nonpublic information; however, it is not material because it will not move the stock price.

Contrary to popular misconceptions, not all insider trading is illegal. Insiders are legally permitted to buy and sell shares of their company's stock, provided the transactions are registered and filed with the Securities and Exchange Commission (SEC).

The illegal type of insider trading takes place when material nonpublic information is used to obtain an unfair advantage. For example, say a director of marketing at an automotive company overhears a meeting between the chief executive offer (CEO) and the chief financial officer (CFO). Three days before the company releases its earnings, the CFO tells the CEO that the company did not meet its expected revenue forecasts and lost money over the past quarter.

The director with the nonpublic information knows that a cousin owns several shares in the company and advises this cousin to sell them right away. That is an example of material nonpublic information because the most recent financial results have not yet been released to the public.

Imagine that the cousin mentioned above then sells shares the next day before the earnings numbers are released. Taking action on this insider information could be considered illegal insider trading since it creates an unfair advantage over other investors.

If, on the other hand, the cousin waits to sell shares until after the numbers are released to the public, the trade is more likely to be legal. At that point, the data would be publicly available information instead of nonpublic material information.

There are many types of corporate information that can be considered nonpublic material information. Sometimes, this information comes from within the company affected. Alternatively, it can come from regulatory agencies, lawmakers, credit agencies, or financial institutions.

Other examples of material nonpublic information include critical financial filings such as earnings reports. Upcoming corporate actions that can move the price of a stock are often considered as nonpublic material information, too. Examples include prior knowledge of initial public offerings (IPOs), acquisitions, stock buybacks, or splits.

The outcomes of pending legal proceedings can also be considered material nonpublic information. Such outcomes include decisions in lawsuits and rulings by agencies like the Food and Drug Administration (FDA) and the National Highway Traffic Safety Administration.

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