Form 3 is a legal declaration to the Securities and Exchange Commission (SEC) provided by someone who owns what is known as a “beneficial share” in a company's securities, such as a director or officer of a company. People who hold more than 10% of a company's shares must also file this form. The form discloses the person's name and the number of securities owned, and serves as an initial declaration of shares owned by someone who is considered an insider at the company. It is not illegal for a person to hold securities while he is an insider, but if he engages in trades using proprietary or confidential knowledge, he can be subject to penalties.
Once someone has filed a Form 3 with the SEC, updates to the information on the form can be made with a Form 4. Additionally, people are required to make an annual declaration on a Form 5, summarizing their financial activity with the shares they hold over the course of the year. All of these forms are used to ensure that insiders accurately and completely report on their roles with the companies they are affiliated with so the SEC can monitor financial transactions for signs of suspicious activity.
On the Form 3, people are asked for contact information and a detailed list of the securities they hold in a company where they could be considered to have an insider status. People who are not sure about whether they need to file the Form 3 can consult an attorney for advice. Attorneys can also help people with filing these documents, updates, and annual reports. Often, accountants can arrange to file the forms automatically with any other necessary financial disclosures, if their clients request this service.
People are welcome to buy and sell shares in companies they enjoy an insider position with, as long as they use freely available public information to make investment decisions. Obviously, it is hard to disregard information one already has, but investors can ask themselves if they would make a sale, purchase, or exchange on the basis of information known to the public. For instance, if a company is in trouble but hasn't made public filings on the situation yet, insiders who dumped their shares could be accused of insider trading, using their special status to benefit themselves.
The SEC makes copies of the Form 3 readily available. People can write or fax to request copies and may also download them online. Information on how and where to file is available on the form. People who provide accounting and legal services to investors commonly keep a stock of such forms on hand for the benefit of their clients.
