Material non-public information: Overview, definition and example
What is material nonpublic information?
Material nonpublic information (MNPI) refers to any information about a company or its securities that has not been disclosed to the public and could influence an investor’s decision to buy or sell the company’s securities. This type of information is considered "material" if its disclosure could have a significant impact on the price of the company’s stock or other securities. Non-public information means that it has not been made available to the general public, and thus, is only known to a select group of individuals, such as company insiders or those with special access to confidential information.
For example, information about an upcoming merger, a significant financial loss, or a change in key management that has not been publicly announced could be considered MNPI.
Why is material non-public information important?
Material nonpublic information is important because its misuse can lead to illegal activities such as insider trading, where individuals with access to this information trade based on their knowledge before it is made public. Insider trading is prohibited because it gives unfair advantages to those who have access to non-public, potentially market-moving information. Regulatory authorities, such as the Securities and Exchange Commission (SEC), closely monitor for violations related to the use of MNPI.
For businesses, handling MNPI with care is crucial to maintaining fair markets and preventing potential legal liabilities. For investors, understanding MNPI is vital for ensuring that they trade based on publicly available information and avoid the risk of being involved in unethical or illegal activities.
Understanding material non-public information through an example
Imagine a senior executive at a publicly traded company learns that their company is about to be acquired by a larger firm, a piece of information that has not yet been made public. If the executive shares this information with a friend who then buys shares in the company, expecting the stock price to rise once the acquisition is announced, this constitutes insider trading. The information about the acquisition is material and non-public, and trading on this basis is illegal.
In another example, an employee at a tech company knows that the company has just developed a groundbreaking new product that is expected to significantly increase revenues. The employee shares this information with an outside investor, who then purchases stock in the company before the product launch is publicly announced. This is also an example of insider trading, as the information was material, non-public, and used for personal gain.
An example of a material non-public information clause
Here’s how a material non-public information clause might appear in an insider trading policy or securities agreement:
“The Company’s employees, directors, officers, and affiliates are prohibited from using material non-public information obtained in the course of their employment or association with the Company for personal gain, including but not limited to the purchase or sale of the Company’s securities. Material non-public information is considered any information not yet publicly disclosed that could influence an investor’s decision to buy or sell the Company’s securities, such as financial results, strategic plans, or potential mergers or acquisitions.”
Conclusion
Material non-public information is critical in maintaining fair trading practices and preventing insider trading. This type of information, if misused, can lead to significant legal consequences and undermine the integrity of financial markets. For businesses, safeguarding MNPI is essential for compliance with securities laws, while for investors, trading based on publicly available information is key to ensuring fair and legal market participation.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.