What is Form 4?

C. Mitchell
C. Mitchell
Man climbing a rope
Man climbing a rope

The United States, along with most countries, regulates and closely watches corporate stock exchange practices. All U.S. companies must disclose the structure of their stock and other equity ownership with the Securities and Exchange Commission (SEC), a government agency, through a series of forms and filings. Form 4 is an SEC form that corporate directors and officers must fill out if they sell any portion of their personally held shares of the company. The form must be filed within two days of the trade, and helps the SEC regulate insider trading. Upon filing, a completed Form 4 becomes public record, and is searchable and accessible to anyone.

The primary function of Form 4 is to indicate significant changes in corporate ownership. For companies that are publicly traded, the stocks and other equities available on the market each represent an actual piece of the corporation. Owning a majority of the shares translates to control of the company. The SEC pays particular attention to the manner in which corporate pieces are traded by “insiders,” those with close knowledge of the company’s inner workings. Directors, owners, and individuals who own 10% or more of a company’s public holdings are all considered by the SEC to be insiders.

The SEC requires all insiders of new corporations to disclose the extent of their ownership in a form known as Form 3. If and when the ownership structure as set out in Form 3 changes, each insider whose status has changed must fill out and file Form 4. Form 4 is a basic record of when the trade occurred, the parties involved in the transaction, and the net value of the shares exchanged. The form must be submitted to the SEC within two days of the trade. The SEC sometimes grants deferments, but no deferment will excuse disclosure: deferred-disclosure trades must be made identified on Form 5, due within 45 days of the close of the company’s fiscal year.

Insiders are not prohibited from trading their corporate shares, but the SEC closely watches the process because the ease with which impropriety can attach. Insider trading that involves the disclosure of non-public material information violates the United State’s Securities and Exchange Act of 1934, section 20A et seq., and is a crime punishable by fine and/or imprisonment. An example of illegal insider trading is a company whose insiders know the corporate value is soon to skyrocket, but sell shares to friends and family at a low price days before the changing value is made public. Before long the new owners find themselves with very valuable stock bought at a low price, an advantage not available to the general public. Form 4 is in many ways an averment that all insider sales were made in good faith.

All SEC filings are archived and managed by the SEC’s Electronic Data Gathering, Analysis, and Retrieval system, commonly known as EDGAR. The SEC requires that all filings, including Form 4, be electronically uploaded directly to EDGAR. Anyone may search the EDGAR database, and Form 4 filings are almost immediately made public within that system. Investors often track corporate form filing as a means of trying to determine favorable times to buy and sell shares.

You might also Like

Discuss this Article

Post your comments
Forgot password?
    • Man climbing a rope
      Man climbing a rope