10b5-1 Trading Plan
A pre-arranged stock trading plan that allows corporate insiders to sell shares on a predetermined schedule, providing an affirmative defense against insider trading allegations.
What Is a 10b5-1 Trading Plan?
A 10b5-1 trading plan (named after SEC Rule 10b5-1) is a written plan for trading securities that is established when the insider does not possess material nonpublic information (MNPI). Once the plan is in place, trades execute automatically according to the predetermined schedule, price triggers, or formula — even during periods when the insider may possess MNPI. The plan provides an affirmative defense against insider trading liability under SEC Rule 10b-5.
10b5-1 plans are used primarily by corporate officers, directors, and other insiders who have ongoing access to confidential company information. Without a plan, these individuals are restricted to trading only during narrow open trading windows. With a plan, they can sell shares consistently, manage their concentration risk, and generate liquidity without worrying about timing their trades around information blackouts.
How 10b5-1 Plans Work
Establishing the Plan
To establish a valid 10b5-1 plan, the insider must:
- Not possess MNPI: At the time the plan is adopted, the insider must not have material nonpublic information about the company
- Act in good faith: The plan must be entered into in good faith and not as part of a scheme to evade insider trading laws
- Specify trades: The plan must specify the amount, price, and date of trades, or provide a written formula or algorithm for determining these parameters
2023 SEC Amendments
The SEC significantly tightened 10b5-1 plan rules effective February 2023:
- Cooling-off period: Officers and directors must wait at least 90 days (or until the next quarterly earnings release, whichever is later) after adopting a plan before the first trade can execute. Other insiders must wait 30 days.
- Single-trade plans: Plans designed to execute a single trade are limited to one per 12-month period
- Good faith certification: Directors and officers must certify that they are not aware of MNPI and that the plan is adopted in good faith
- No overlapping plans: Insiders cannot have multiple overlapping 10b5-1 plans
Plan Modifications and Terminations
Modifying a plan is treated as adopting a new plan — triggering a new cooling-off period. Frequent modifications or terminations can undermine the plan's affirmative defense. Companies and their legal counsel generally advise against modifying plans once established.
Common Plan Structures
Scheduled Sales
The most common structure specifies regular sales on predetermined dates — for example, selling 5,000 shares on the first trading day of each quarter. This provides a predictable stream of liquidity and demonstrates a systematic approach unconnected to inside information.
Price-Triggered Sales
Some plans specify sales triggered by stock price thresholds — for example, sell 10,000 shares if the stock reaches $100 per share. These plans allow the insider to capture gains at target prices.
Limit Order Plans
A hybrid approach sets a minimum price floor — sell up to 2,000 shares per week at a price no lower than $75. This provides regular liquidity while protecting against selling at depressed prices.
Practical Implications for Startup Employees
Post-IPO Selling
After an IPO and the expiration of the lockup period, many employees (especially those in leadership or with access to financial data) are considered insiders. A 10b5-1 plan allows you to sell shares during blackout periods when you otherwise could not trade. This is particularly valuable if your company has extended blackout periods that leave only a few weeks per quarter for open trading.
Managing Concentration Risk
If a significant portion of your net worth is in your employer's stock, a 10b5-1 plan provides a disciplined framework for diversifying. Regular scheduled sales reduce concentration risk systematically without requiring you to time the market or worry about possessing MNPI.
Company Policies
Most public companies require pre-clearance of 10b5-1 plans through their legal or compliance department. Some companies restrict when plans can be adopted (only during open trading windows) and mandate specific terms. Review your company's insider trading policy before establishing a plan.
Not Just for Executives
While 10b5-1 plans are most commonly associated with C-suite executives, any employee who is designated an insider or who has access to material information can benefit from one. If your company's insider trading policy restricts your ability to sell during blackout periods, a 10b5-1 plan may be the most practical way to achieve regular liquidity.
How It Relates to Exercising Stock Options
A 10b5-1 plan can be structured to include both exercises and sales. For NSOs, a plan can specify exercise-and-sell transactions on predetermined dates, allowing you to exercise options and sell shares in a single automated transaction during blackout periods. For ISOs, the plan can schedule sales of previously exercised shares. If you hold a large option position at a public company and are subject to trading restrictions, a 10b5-1 plan is often the most practical mechanism for systematically exercising options and converting them to cash or diversified investments.