Audience Questions

Are there cooling off period requirements in place? There are no cooling off periods mandated by the Securities Exchange Commission (“SEC”). Companies do enforce their own rules that can vary.

• Using our data since 2004, the average sale began 93 days after plan adoption and the median was 64. 16.7% of 10b5-1 plans sold within 30 days of plan adoption.
• Data since 2019 shows 9.5% of 10b5-1s sold within 30 days, indicating that companies and insiders are shifting to slightly longer waiting periods.
• Morgan Stanley twice surveyed companies based on their 10b5-1 plan practices. In 2018, Morgan Stanley found that 9% of companies didn’t have cooling-period restrictions and 10% had limitations of less than 30 days. 19% mandated that 10b5-1 start no earlier than the subsequent open trading window. The most common waiting period was 30 days in 2018. The survey results compared to 2015 also showed that companies are moving to slightly longer waiting periods.

Has InsiderScore looked at cooling-off periods and single-trade plans across market-cap ranges? InsiderScore has examined the days to first trade and number of sales per plan by market-cap ranges. Smaller companies are more likely to allow insiders to sell within the first 30 days as compared to larger companies, likely driven by corporate governance differences. It’s more likely that insiders of smaller companies will use 10b5-1 plans with multiple sales as compared to insiders of larger companies. The difference likely is driven by market-characteristics in which it’s much easy for an executive of a large company so sell bigger blocks of stock at once.

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Do 10b5-1 purchases similarly exhibit outperformance after transactions? InsiderScore has not done a comparative analysis of 10b5-1 plan buys. However, a 2015 study by Nejat Seyhun of the University of Michigan does shed light on the topic.

• Seyhun’s 2015 study examined profitability of insider transactions both with and without 10b5-1s to analyze whether 10b5-1 Safe Harbor rules need to be re-written.
• His research showed that both buying under 10b5-1 plans and buys without trading plans outperformed the market. Though there was no statistical difference between the two. Part of the implication of the data was the insiders use trading plans for purchases just as they do with non-planned buys. At the time, Seyhun didn’t slice up days to first trade like more recent academic research, but did analyze the first trade in a 10b5-1 versus subsequent trades.
• The outcome of the 2015 research paper was a proposal of changes to 10b5-1 rules, including mandating a six-month cooling off period.

How do you know if the 10b5-1 plan is single-trade ex-ante? 10b5-1 details are rarely shared with the public, making it difficult to discern whether a 10b5-1 plan will be one-and-done. The only situation it is possible to see know after a sale for a plan that was disclosed ahead of time in an 8-K. The 8-K will often reveal the max number of shares to be sold and first sale lends insight into the follow-up sales. Occasionally the first sale matches the max shares to be sold, which is a clear indication of a one-and-done plan. Other times, the first sale may simply be the start of a pattern. An example of the former:

• Jon Feltheimer, CEO of Lions Gate Entertainment (LGF-A), adopted a trading plan on March 12, 2021 for up to 300K shares via an 8-K filed on March 15. The filing also divulged that the plan would commence between April 12 and April 30, 201 subject to “specific market price”.
• The 10b5-1 plan sold 300K shares from April 26 to April 28, 2021. The sales were filed all under the same form 4, thus the conclusion was the plan was one-and-done.
• Feltheimer previously adopted one prior 10b5-1 plan for 1M shares spread equally over four sales.

How to find suspicious looking 10b5-1 plans/sales? Red flag sales take many forms. They can be a one-off, unusually aggressive sales or a series of price triggers staking out a particular valuation level. Finding suspect sales often involve nuanced characteristics such as comparisons to historic selling and timing of plan adoption, sale and company activity including earnings announcements.

• The Idea Gen tab on the InsiderScore platform is a useful tool in finding noteworthy. Users can filter based on companies that have recent research coverage, any variety of unusual event and other insider related data points. The screener also allows users to focus on market-cap ranges, industry groups or watchlist matches.
•  Whenfocused on attributes such as price triggers, users can surface companies thathave seen recent opportunistic selling. The InsiderScore research team issuesbriefs on noteworthy activity. The image below is example of the Idea Genscreen results.

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• The Idea Gen page surfaced price triggered 10b5-1 plan selling at Blueprint Medicines (BPMC), among other companies. BPMC was examined in a September 28, 2021 Informational Sell Brief after executives sold, including a price trigger as high as $110.00. As noted in the brief, the activity featured the chief legal officer selling after her only previous sale was timely 3.5 years earlier. The unusual events can spot quantitative attributes such as price triggers whereas the briefs add qualitative context.
• Moving to the company-specific overview pages, users can gain additional information on recent transactions at a company. Continuing to use BPMC as an example, trades over the month of September include two executives targeting $110.00 after earlier targeting of $100.00. The price triggered selling bookended Chief Legal Officer Tracey McClain selling at $108.85; her IQ is listed as high because of the subsequent price performance from her prior sale.‍

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