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Material Nonpublic Information

The laws governing insider trading are based on the idea of material nonpublic information: any information that would influence an investor's decision to buy or sell securities. The most common example is information that would influence the price of stock in a publicly traded corporation, say, information that a drug company has developed a promising treatment for AIDS. This is material because of the tremendous potential profits to be made from an effective AIDS treatment. If an international drug firm develops a slightly improved wart remover, this would probably not be material information because it would add little to the company's profits. This information about the same wart remover, however, might be material information to a small drug manufacturer with only a few products.

Nonpublic information is information that is not available to members of the general investing public. It is illegal for company insiders with access to this material nonpublic information to use it to profit from the stock market. This insider trading encompasses directly profiting from stock trades, indirectly profiting through the trades of family, friends, or business associates, and intentionally giving the information to other persons, who then profit from the information.

For example, assume that a small, publicly traded biotech research company discovers a method that may lead to an AIDS vaccine. This is material information; it will affect the price of the company's stock when it becomes public. The company insiders cannot trade in the stock until the shareholders are made aware of the new material information. If the information is presented at a small scientific meeting, it would be in the public domain, but it would not be reasonably available to shareholders until it was reported in a widely circulated publication such as the Wall Street Journal. If the company is small and the information is less newsworthy than an AIDS treatment, the information may never be published nationally. The company may have to send a letter to all shareholders to ensure that they are aware of the material information.


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