10b5-1 Trading Plans: Pre-Scheduled Selling for Insiders

Selling When You Know Too Much

If you work at a public company and have access to material nonpublic information (MNPI) — quarterly earnings, product launches, acquisitions, layoffs — you are restricted from trading your company's stock during blackout periods. For many insiders, these blackout periods leave only a few weeks per quarter when trading is permitted. A 10b5-1 trading plan solves this problem by allowing you to pre-arrange trades when you are not in possession of MNPI, so they execute automatically even during blackout periods.

This guide explains how 10b5-1 plans work, the critical 2023 SEC rule changes, and how to use them effectively.

How 10b5-1 Plans Work

The Basic Structure

A 10b5-1 plan is a written agreement between you and your broker that specifies future trades — including the number of shares, price triggers, and dates. The plan is adopted when you do not possess MNPI. Once established, the trades execute according to the plan's terms, regardless of what information you later possess.

The plan provides an affirmative defense against insider trading allegations: even if you learn material information after adopting the plan, the pre-existing plan demonstrates that the trades were not based on that information.

Three Types of Plans

1. Formula plans: Trades are determined by a mathematical formula (e.g., "sell 1,000 shares on the first trading day of each month")
2. Price-triggered plans: Trades execute when the stock reaches specified prices (e.g., "sell 5,000 shares if the price exceeds $100")
3. Discretionary plans: You delegate trading authority to your broker, who executes trades at their discretion. The broker must not possess MNPI and cannot consult with you.

The 2023 SEC Amendments

The SEC significantly tightened 10b5-1 rules effective February 2023:

Cooling-off period: Directors and officers must wait the later of 90 days or the next quarterly earnings release after adopting a plan before any trade can execute. Other insiders must wait 30 days. This prevents the abuse of adopting plans while in possession of soon-to-be-released information.

Good faith certification: Directors and officers must certify in writing that they do not possess MNPI and are adopting the plan in good faith.

Single-trade plan limitation: Plans designed for a single trade are limited to one per 12-month period. This prevents serial single-trade plans that mimic informed trading.

No overlapping plans: You cannot have multiple active 10b5-1 plans at the same time (with limited exceptions for plans that meet specific criteria).

Disclosure requirements: Companies must disclose the adoption and termination of 10b5-1 plans by directors and officers in their SEC filings.

Setting Up a 10b5-1 Plan

Step 1: Confirm Eligibility

Review your company's insider trading policy. Most policies require that 10b5-1 plans be pre-approved by the company's legal or compliance department. Some companies restrict when plans can be adopted (only during open trading windows) and mandate specific terms.

Step 2: Adopt During an Open Window

Establish your plan during a period when you are not in possession of MNPI and the company's trading window is open. Typically, this is the period shortly after quarterly earnings are released and before the next blackout period begins.

Step 3: Design the Trading Strategy

Work with your broker to design a plan that matches your financial goals:

• Regular schedule: Sell a fixed number of shares on the first trading day of each month or quarter. This provides predictable liquidity and looks routine to regulators.
• Percentage-based: Sell a percentage of your remaining holdings periodically, reducing the position gradually.
• Limit orders: Set minimum price floors to avoid selling at depressed prices.
• Combination: Sell regularly with a price floor (e.g., "sell 2,000 shares per month at a price no lower than $50").

Step 4: Wait for the Cooling-Off Period

If you are a director or officer, no trades can execute for at least 90 days (or until after the next quarterly earnings report). Plan accordingly — if you need liquidity in Q1, establish the plan in Q3 of the prior year.

Step 5: Do Not Modify or Terminate

Once established, avoid modifying or terminating the plan. Modifications are treated as adopting a new plan (triggering a new cooling-off period), and frequent modifications undermine the plan's affirmative defense.

Strategic Uses for Startup Employees

Post-IPO Diversification

After your lockup expires, a 10b5-1 plan allows systematic diversification. Instead of trying to time the market or making emotional selling decisions, the plan executes automatically. This is particularly valuable during the volatile post-IPO period when you may have strong opinions (and inside information) about the company's trajectory.

Exercise-and-Sell Plans

A 10b5-1 plan can include both option exercises and share sales. For NSOs, the plan can specify: "On the first trading day of each month, exercise 2,000 options and sell the resulting shares." This automates the exercise-and-sell process and ensures it occurs even during blackout periods.

Retirement or Departure Planning

If you plan to leave the company, establishing a 10b5-1 plan before you give notice allows you to sell shares during the transition period when you may be in possession of MNPI about your own departure or the company's succession plans.

Common Pitfalls

Adopting While Possessing MNPI

The most critical requirement is that you do not possess MNPI when the plan is adopted. If it is later discovered that you had material information at adoption, the plan's affirmative defense can be voided. Be conservative — if there is any doubt about whether you have material information, wait.

Frequent Modifications

Multiple modifications signal to regulators that you are using the plan to trade on information rather than as a genuine long-term strategy. Adopt a plan and stick with it.

Cancelling Before Bad News

Terminating a plan just before negative news is released is a red flag. While plan termination is permitted, the timing and pattern of terminations are scrutinized by the SEC and plaintiffs' attorneys.

The Bottom Line

A 10b5-1 trading plan is the most effective tool for insiders to systematically sell company stock while managing legal risk. The 2023 SEC amendments impose meaningful constraints — cooling-off periods, single-trade limitations, and disclosure requirements — but a well-designed plan adopted in good faith provides both legal protection and financial discipline. If you hold a significant position in your employer's stock and are subject to blackout period restrictions, a 10b5-1 plan should be a core component of your financial strategy.