Section 16: The Basics of Forms 3, 4, and 5

• Persons who hold more than 10% of a company’s registered class of securities
• Company insiders, which typically include officers and directors

SEC Form 3

Under U.S. securities law, SEC Form 3 is required when an individual becomes a corporate insider, meaning that once they have been appointed as an officer, director, or have become the beneficial owner of more than 10% of any class of the company's registered securities, a Form 3 must be filled within 10 calendar days. 

The main objective of this form is to track the ownership of individuals closely connected to the company. This information is then made available to the public, helping to ensure fairness and transparency in the financial markets.

Key Components of Form 3

• Insider Identification: Form 3 requires details including their name, address, and relationship to the company (officer, director, etc.).
  
  

• Issuer Information: This section includes the name of the company issuing the securities and its ticker symbol.
  
  

• Securities Information: Information about the securities owned by the insider is required. This includes the type of security (common stock, preferred stock, etc.), number of shares owned, and any associated options or derivative securities.
  
  

• Ownership Nature: You must specify whether the ownership is direct or indirect. Direct ownership meaning securities owned outright by the insider, and indirect ownership, meaning any securities held by family members, trusts, or other entities controlled by the insider.

Examples of When SEC Form 3 Must Be Filed

Example 1: Appointment of a New Officer

Scenario: Jane Doe is appointed as the Chief Financial Officer (CFO) of XYZ Corporation on July 1, 2024.

Filing Requirement: Since Jane has become an officer of the company, she is now considered a corporate insider.

Due Date: Jane must file SEC Form 3 within 10 calendar days of her appointment. Therefore, the due date for her Form 3 filing would be July 11, 2024.

Example 2: New Director Joins the Board

Scenario: John Smith is elected to the Board of Directors of ABC Inc. on August 15, 2024.

Filing Requirement: As a new director, John is required to disclose his ownership of ABC Inc.’s securities by filing Form 3.

Due Date: John must file SEC Form 3 within 10 calendar days of his election to the board. The due date for his Form 3 filing would be August 25, 2024.

Example 3: Beneficial Owner Acquires More Than 10% of Shares

Scenario: Mary Johnson acquires 12% of the outstanding common stock of DEF Corporation on September 1, 2024.

Filing Requirement: Mary’s acquisition makes her a beneficial owner of more than 10% of DEF Corporation’s registered securities, necessitating the filing of Form 3.

Due Date: Mary must file SEC Form 3 within 10 calendar days of the acquisition. The due date for her Form 3 filing would be September 11, 2024.

SEC Form 4

When a company insider's beneficial ownership changes, Form 4 must be filed within two business days. 

Form 4 is essential for investors, regulators, and analysts who want to track insider trading activities. By analyzing Form 4 filings, investors can gain valuable insights into how insiders' are viewing the company’s future prospects. For example, if an insider decides to purchase a significant amount of company shares, this might signal that they are confident in the company's future, while the opposite may raise some concerns. 

Key Components of Form 4

• Identification of the Insider: Like Form 3, Form 4 requires detailed information about the insider, including their name, address, and their relationship to the company (officer, director, etc.).
  
  

• Transaction Date: The date on which the transaction occurred.
  
  

• Securities Information: The type of security involved (common stock, preferred stock, etc.), the number of shares or units bought or sold, and the price at which the transaction was executed.
  
  

• Ownership Nature: The nature of ownership must be distinguished between direct and indirect ownership.
  
  

• Transaction Codes: SEC Form 4 includes specific codes to indicate the nature of the transaction. For example, "P" denotes a purchase, "S" indicates a sale, and "A" represents an award or grant of securities.
  
  

• Balance Information: This section is meant to show the insider's holdings before and after the transaction, providing clear documentation of how their ownership has changed.

Examples of When SEC Form 4 Must Be Filed 

Example 1: Insider Purchases Additional Shares

Scenario: Jane Doe, the Chief Financial Officer (CFO) of XYZ Corporation, purchases 1,000 shares of XYZ Corporation on June 1, 2024.

Filing Requirement: Since Jane’s ownership of XYZ Corporation’s securities has changed, she is required to file Form 4 to report this transaction.

Due Date: Jane must file SEC Form 4 within two business days of the transaction. Therefore, the due date for her Form 4 filing would be June 3, 2024 (assuming there are no holidays or weekends between these dates).

Example 2: Director Sells Shares

Scenario: John Smith, a Director of ABC Inc., sells 500 shares of ABC Inc. on July 10, 2024.

Filing Requirement: John’s sale of ABC Inc.’s shares represents a change in his ownership, necessitating the filing of Form 4.

Due Date: John must file SEC Form 4 within two business days of the transaction. The due date for his Form 4 filing would be July 12, 2024 (assuming there are no holidays or weekends between these dates).

Example 3: Beneficial Owner Receives a Grant of Options

Scenario: Mary Johnson, a beneficial owner of more than 10% of DEF Corporation, receives a grant of stock options on August 15, 2024.

Filing Requirement: The grant of stock options changes Mary’s ownership, requiring her to file Form 4.

Due Date: Mary must file SEC Form 4 within two business days of receiving the grant. The due date for her Form 4 filing would be August 17, 2024 (assuming there are no holidays or weekends between these dates).

SEC Form 5 

SEC Form 5 is an annual filing used to report transactions not previously reported on a Form 4 and must be filled within 45 days after the end of the company’s fiscal year.

The main reason why transactions are not reported on a Form 4 are typically due to administrative oversight or delay. 

Mistakes happen and Form 5 provides a catch-all mechanism to ensure that these transactions are eventually disclosed and reported. 

Note: Dispositions in the form of a gift made before February 27, 2023 remain reportable on Form 5 within 45 days after the end of the company's fiscal year, but gifts made by an insider after April 1, 2023 are now required to be reported on Form 4 within two business days of the date the gift was made. Gifts of stock to the insider are reportable on Form 5 (but can be voluntarily reported on Form 4). 

Key Components of SEC Form 5

• Insider Identification: Like the other forms, Form 5 requires detailed information about the insider, including their name, address, and relationship to the company.
  
  

• Issuer Information: This section includes the name of the company issuing the securities and its ticker symbol.
  
  

• Securities Information: Detailed information about the securities such as the type of security, the number of shares, and the date of the transactions.
  
  

• Ownership Nature: It must be specified whether the ownership is direct or indirect.
  

Examples of When SEC Form 5 Must Be Filed

Example: Administrative Oversight – Missed Form 4 Filing

Scenario: Mary Johnson, a beneficial owner of more than 10% of DEF Corporation, purchased 500 shares on March 1, 2023, but failed to file Form 4 due to an administrative oversight.

Filing Requirement: Mary can rectify this oversight by including the missed transaction in her Form 5 filing.

Due Date: Mary must file SEC Form 5 within 45 days after the end of DEF Corporation’s fiscal year. If DEF Corporation's fiscal year ends on December 31, 2023, the due date for her Form 5 filing would be February 14, 2024.

Available Resources

Filing Forms 3, 4, and 5 can be a complex process for the uninitiated and the fundamentals are necessary in order to tackle these filings with confidence. 

For this reason, the NASPP Stock Plan Fundamentals course is an ideal opportunity for those looking to develop the essentials of stock plan administration,