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Facebook Is Not Immune From Insider Trading Rules

Mark Zuckerberg
Getty Images
Mark Zuckerberg

One of the questions I keep getting asked is why insider trading law should apply to an "unregulated" company like Facebook.

The truth is that Facebook is not unregulated.

In 2008 Facebook received permission from the Securities and Exchange Commission to issue unregistered stock to employees, directors and consultants.

This allows Facebook to avoid many of the disclosure requirements that public companies must meet. There's no requirement, for instance, that it disclose the compensation of its top executives.

But the SEC did not exempt Facebook from all securities regulations. Rules about insider trading, for example, still apply.

In fact, the law on which insider trading rules are based—Section 10b-5 of the Exchange Act of 1934—specifically includes unregistered securities.

The law states that it is unlawful to "use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act), any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."

The SEC and the courts interpret buying or selling a stock while in possession of non-public material information as employing a "manipulative or deceptive device."

There's no Facebook exemption for insider trading.

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