What is material nonpublic information? Definition and meaning
Material nonpublic information refers to certain information about a company which could affect its share price and investment decisions as soon as the information has been made public. However, the public does not yet have access to this information.
Material nonpublic information, as opposed to immaterial non-public information, can be manipulated to gain an unfair advantage in the marketplace. This is known as insider trading or insider dealing.
The terms ‘material’ and ‘immaterial’ mean ‘relevant’ and ‘irrelevant’ in the contexts when they are used.
For example, imagine you are one of the directors at John Doe Organics Inc., a company that sells organic milk, eggs and some other foods to supermarkets across the country. People buy your company’s products because they are free of pesticides, artificial fertilizers, preservatives, etc.
You have just been told in a confidential meeting that an internal investigation has found that 15% of all John Doe’s products contain significant traces of insecticides – thus making them not organic. As soon as this information goes public, you know that sales will nosedive.
If your best friend owns $1 million dollars’ worth of John Doe’s shares and you tell her to sell them immediately, you are doing this based on material non-public information – confidential information that is relevant to the company’s share price and investor decision-making, about which the public knows nothing.
By telling your friend about this, and your friend acting on that information to sell the shares before the bad news becomes public, you are guilty of insider trading – in some jurisdictions your friend is also guilty. Unlawful insider trading is an imprisonable offence.
The information you give your friend is ‘material’ in the sense that it is ‘relevant’ to the company’s share price and how investors are likely to decide.
If you hear that the CEO of your company has taken up basket-weaving as a weekend hobby, and nobody outside the company knows about this, it is nonpublic information, but definitely not ‘material’ – there is no way that this information, if it became public, could have an effect on the company’s share price or investor decision-making. Hence, the basket-weaving information is ‘immaterial’.
The US Securities and Exchange Commission (SEC) makes the following comment regarding insider trading and material nonpublic information:
“Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material nonpublic information about the security.”
Policy for material nonpublic information
Many companies, especially those whose employees gain access to confidential information on several publicly-traded corporations, have a policy for material nonpublic information.
New York-based Moody’s, the famous bond credit rating company, says that employees who have access to confidential information are not allowed to share or use that information of the purposes of buying or selling securities, or any other purpose except for those related to their employment duties at Moody’s.
On its website, Moody’s writes:
“Insider trading (or dealing) laws and regulations globally prohibit buying or selling a company’s securities while in possession of Material Non-Public Information about that company. You can also violate these laws by disclosing Material Non-Public Information to another person if, as a result, that person – or any other person – buys or sells a security while aware of that information.”
“If you make such a disclosure or use such information, you can be punished, even if you yourself stand to make no financial gain.”
Definition of ‘material’ and ‘nonpublic’ information
‘Material’, in this context, refers to any information that:
- may influence the market for a security generally
- may influence an investment decision of a reasonable investor.
Information is deemed to be ‘nonpublic information’ unless it has been released for public access, for example, through:
- public filing with a securities regulatory authority
- the publication of a prospectus
- the publication of a press release
- disclosure of the information in a national or broadly disseminated TV, radio or print news service
- the issuance of a proxy statement.
Video – When is insider trading illegal?
Insider trading is illegal when somebody uses material non-public information for personal gain or to avoid a personal loss. This Seeker Daily video explains what Martha Stewart did and why she ended up in prison. Martha Stewart is an American businesswoman, TV personality and writer.