Material Nonpublic Information

Updated on April 4, 2024

Material Nonpublic Information Definition

Material Nonpublic Information, also known as insider information, is the information that is important but is not supposed to be disclosed to the public as the disclosure of the same has to affect the price or decision of investors of the company, and this information is known only to authorized personnel of the company.

Explanation

The information that is only known to authorized persons and related to the company’s internal decisions and is not for general public disclosure is known as material nonpublic information. The disclosure of information led to affecting the price of shares in the stock marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price.read more which can adversely or favorably affect the company’s working. For example, suppose any company personnel disclosed the information to persons other than those authorized by the company, and that information is used to earn a profit. In that case, that person will be penalized and liable for imprisonment. Information is considered material only if it has the power to affect the price of shares, such as information about increase or decrease of dividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more, decision regarding sale or purchase of assets by company, amalgamationAmalgamationAmalgamation is the consolidation or combination of two or more companies, known as amalgamating companies, usually in the same or similar line of business, to produce a new legal entity, known as the amalgamated company, with the same shareholders, assets, and liabilities.read more or merger decision, stock splitStock SplitStock splits refer to the process whereby a company increases its number of shares, reducing the per-share price of the stocks. read more, or consolidation shares, etc.

Material Nonpublic Information

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Video Explanation of Material Nonpublic Information

 

Examples of Material Nonpublic Information

Below are some examples to understand the concept in a better manner –

Example #1

XYZ Ltd, a Mobile manufacturing company, developed a new method to reduce manufacturing costs to half of the current cost, giving XYZ Ltd huge profits. However, this information could affect the company’s share price in the stock market if it got published.

Also, suppose an employee of the company knows or has access to the information in the company and uses it by purchasing the shares of the company through relatives or friends. In that case, that person will be penalized and terminated by the company and liable for imprisonment.

Example #2

Another Example of Material Non-Trading information can be the case of ABC Ltd, which is a software manufacturing Government company. It invented a software that can be inbuilt in robots and that robots can be used as a military force and can be proved beneficial for the country. When available to the public, the demand for shares of ABC Ltd can rise to a large extent. Hence, the company prohibits its employees from trading on the stock exchange until the information is released to the public. If any employee indirectly trades on an exchange, it would amount to insider tradingInsider TradingInsider trading is defined as the act of taking key trading decisions related to a company’s listed stock using critical non-public information. The US Securities and Exchange Commission (SEC) penalizes offenders of illegal insider trading as it causes material loss to the investors. It also shakes their faith in the stock market. read more and liable for strong actions.

Example #3

Another Example is a food product manufacturing company comes to know based on a research report that one of their products contains such elements that can affect blood pressure patients’ health. They do not disclose the fact on the batch of product that the product is not safe for blood pressure patients, and the disclosure of which can lead to loss of trust in the product by society and can result in a decline in a sale. If the information is circulated to the public by unofficial sources, i.e., by insider trading, the company has to bear heavy losses and have a negative image in public. So to prevent this company may frame policies that prevent the unofficial disclosure or leak of information by insiders of a company as this can have a large effect on the company’s share price, and the situation may demand the shutdown.

What does Material Nonpublic Information Include?

Information about the following can be considered material –

Impact

Material Nonpublic Information Policy

The policies on material nonpublic information depend on company to company. However, some of the policies are as under:

  • Ban direct or indirect trading in securities by employees or relatives of employees (in some cases) until the information becomes public.
  • Authority to access material nonpublic information to top management or by the permission of top management only;
  • Imposing restrictions on contra trade until the information is officially announced, i.e., none of the employees or persons related to an employee can purchase or sell the company’s shares six months before the information is disclosed in public.
  • Initial disclosure policy, i.e., employees are required to submit the holding by their relatives or persons connected with employees within a few days of purchasing securities and changes thereon.
  • Regulations to be followed by every company with regards to the listing, issue, and right issue or further issue of shares;
  • Policy and agreement on maintenance of confidential information between the company and employees or third party.

Conclusion

Material nonpublic information is the information that is material and can affect the price and decision of investors.’ Still, the information is related to internal matters of a company such as a decision on investment in a certain project, dividend declaration rate, litigation on lender, purchase or sale of fixed assets, defaults by and to the company, etc. If company employees use material nonpublic information to earn a profit, it is called insider trading. To prevent insider trading companies, form policies on insider trading and the policy differs from company to company and which can include the restriction on employees to disclose information or trade on the stock exchange or heavy penalties and banned from the job for a specific period, signing of agreement from employees regarding maintenance of confidentiality, etc. Due to this insider trading, policies got stricter and more transparent to be prevented.

Recommended Articles

This has been a guide to material nonpublic information and its definition. Here we discuss what it includes, along with examples and its impact. You may refer to the following articles to learn more about finance –