MNPI in Private Companies: Tipping, 10b5-1 Plans, and Compliance

Material non-public information in private companies is governed by the same federal anti-fraud law that polices Wall Street: if you hold MNPI about a private business, Rule 10b-5 requires you to either disclose it to the other side before trading or stay out of the transaction. Shares in a closely held company are not a safe harbor from insider trading law. The statute reaches “any security,” and enforcement actions regularly involve private placements and small companies alongside the headline cases.

What makes the private setting harder is not the rule but the environment around it. Shares trade infrequently, information stays inside a small circle for months, and there is no press release or SEC filing that cleanly resets what counts as public. That gap is where most problems start.

What Counts as MNPI in a Private Company

Information is material when a reasonable investor would consider it important enough to change a buy or sell decision. In a private company, that threshold is cleared more easily than people expect. Internal financials showing a revenue spike or a looming debt default qualify. So do draft term sheets for a funding round, a pending merger or acquisition, a signed government contract, or a major venture firm taking a significant stake. If it would move the estimated share price, it is material.

The “non-public” piece means the information has not been shared with the broader pool of potential investors. Public companies push information out through filings and press releases within hours. Private companies have no equivalent channel. Board minutes, internal projections, and draft deal documents can stay restricted to a handful of people for months, and all of it remains non-public the whole time.

The Federal Rule That Applies

Section 10(b) of the Securities Exchange Act of 1934 makes it illegal to use any deceptive scheme in buying or selling “any security,” whether or not that security is listed on an exchange.¹ Rule 10b-5, the SEC regulation implementing that section, prohibits using any scheme to defraud, making untrue statements or omitting material facts, and engaging in any practice that operates as a fraud “in connection with the purchase or sale of any security.”²

The practical obligation that flows from Rule 10b-5 is the disclose-or-abstain rule. If you hold MNPI, you either share it with the other party before trading or you do not trade. Believing the price is fair is not a defense. Deciding the other side probably already knows is not a defense.

Winning a Rule 10b-5 case requires proof of scienter, meaning intentional or reckless misconduct. Innocent errors and ordinary negligence are not enough. That protects people acting in good faith, but reckless disregard for whether information is material counts, and that bar is lower than many insiders assume.

What’s at Stake

Civil and criminal exposure can both attach to the same conduct.

On the civil side, a court can impose a fine of up to three times the profit gained or loss avoided from the illegal trade, on top of disgorgement.³ A sale of private shares at $500,000 that hid information cutting the real price in half can carry up to $750,000 in penalties.

On the criminal side, a willful violation of the Exchange Act carries up to 20 years in federal prison and fines of up to $5 million for individuals. Entities face up to $25 million.⁴ The SEC publishes its insider trading enforcement actions, and cases involving smaller companies and private placements appear alongside the public-company matters.⁵

Tipping: You Don’t Have to Trade

Passing MNPI to someone else who then trades on it exposes both of you. Under the Supreme Court’s decision in Dirks v. SEC, the person who shared the information (the tipper) is liable when they received a personal benefit from the disclosure. The benefit does not have to be cash. Giving a friend or family member a profitable trade counts, because handing someone a trading advantage is treated the same as trading and giving them the proceeds.

The person who received the tip is also liable if they knew or should have known the tipper was breaching a duty by sharing. Private company settings make this risk constant. A founder lets slip the shape of an upcoming deal at dinner. A board member tells a spouse about a revenue miss, and the spouse adjusts an investment. Casual conversations are where most tipping violations begin.

Control Person Liability

Section 20(a) of the Exchange Act extends liability to anyone who “directly or indirectly controls” a person who commits a securities violation. The controlling person is jointly and severally liable for the same damages.⁶ In a private company, that reaches the CEO, board members, and managing partners when they had the power to prevent an employee’s violation.

The statute offers one defense: good faith, and no direct or indirect inducement of the violation.⁶ A company with written policies, training, pre-clearance, and blackout periods has a far stronger good-faith argument than one that trusted everyone to do the right thing. The civil penalty cap for a controlling person is the greater of $1 million or three times the profit from the violation.³

How Insiders Stay Compliant

Blackout Periods

Many private companies impose trading blackouts during sensitive windows. A common structure blocks insider trades starting roughly 15 calendar days before the close of a fiscal quarter and lasting until two business days after financial results are released internally or to shareholders. Event-driven blackouts kick in when a specific development is underway, such as a pending acquisition, a new funding round, or a major contract negotiation. During a blackout, no insider trades regardless of whether they personally hold MNPI, because the risk that information will leak is too high to manage case by case.

Pre-Clearance

Before trading, covered individuals submit a request to a compliance officer or general counsel, who checks whether the person holds MNPI and whether a blackout is in effect. This step is boring and it works. It catches problems before they become enforcement actions.

Rule 10b5-1 Plans

A Rule 10b5-1 plan is a written arrangement set up in advance that gives a broker pre-set instructions to buy or sell at specified prices, dates, or quantities. When properly established, the plan is an affirmative defense against insider trading allegations because the trades were set before the person came into possession of MNPI.

Under rules the SEC adopted in 2023, the plan must meet several requirements:

Directors and officers face a cooling-off period before the first trade: the later of 90 days after adoption, or two business days after the company discloses financial results for the quarter in which the plan was adopted, capped at 120 days.⁷
Other insiders face a 30-day cooling-off period.⁷
Directors and officers must certify at adoption that they are not aware of MNPI and that the plan is not a scheme to evade the rules.⁷
Non-issuers can rely on the defense for only one single-trade plan in any 12-month period, and overlapping plans are not allowed.⁷

These plans are most familiar from public company executives, but private company insiders anticipating a liquidity event, a secondary sale, or a company-led tender offer can use them too. The plan has to be adopted during a genuinely clean window with no MNPI in hand, then left to run without modification.

Big Boy Letters Are Not a Shield From the SEC

In negotiated private share deals, parties sometimes use a “Big Boy letter,” in which the less-informed side acknowledges that the other may hold MNPI and agrees to proceed anyway, waiving the right to later claim fraud from the information asymmetry.

The protection has real limits. No court has definitively ruled on whether Big Boy letters are fully enforceable. Section 29(a) of the Exchange Act voids any agreement that requires someone to waive compliance with the Act. Some courts have allowed sophisticated parties to waive known claims, and at least one circuit has upheld waivers even for unknown securities claims. The SEC has taken a harder line: a former associate director in the Division of Enforcement stated publicly that a Big Boy letter would not provide any defense to an SEC insider trading charge. A Big Boy letter may reduce civil litigation risk between sophisticated private parties. It will not stop a government case.

Selling Private Shares: Tender Offers, Secondary Platforms, and ROFR

When a private company organizes a tender offer to buy back employee shares, federal rules require that MNPI be disclosed to all potential participants. That includes current financial statements, risk factors, capitalization details, and anything else material to an investment decision. The offer must stay open at least 20 business days, and a change in price or share quantity extends the window by at least 10 additional business days.

Secondary market platforms such as Forge Global match accredited buyers and sellers of private company shares and facilitate stock transfer agreements at closing.⁸ Rule 10b-5 applies in full on these platforms. A seller who knows the company just signed a transformative contract cannot dump shares into a secondary marketplace without disclosure. The platform is infrastructure, not a legal shield.

Most private company shareholder agreements also include a right of first refusal that gives the company or existing shareholders a chance to buy the shares before an outside sale closes. Typical ROFR windows run 30 to 60 days. If the company exercises, the outside trade does not happen. If it waits, the MNPI clock keeps ticking: information that was non-public when you started may become stale, or new developments may land that trigger additional disclosure obligations before closing.

What a Private Company Compliance Policy Should Cover

A written insider trading policy is the single most useful protection against control person liability, and it is what gives the good-faith defense teeth. The policy does not need to be long. It needs to cover real ground.

Scope. Apply the policy to directors, officers, employees, consultants, immediate family members, and anyone whose accounts an insider influences.
Prohibited conduct. Ban trading while in possession of MNPI, and ban tipping, including casual disclosure to friends, family, or business contacts.
Blackout windows. Set quarterly blackouts around financial reporting, and event-driven blackouts for material developments.
Pre-clearance. Require approval from a compliance officer before any trade in company securities.
10b5-1 plans. Permit pre-approved plans adopted during open windows that meet the SEC’s current cooling-off and certification requirements.
Post-termination obligations. Make clear that restrictions continue after someone leaves until any MNPI they hold has become public or is no longer material.

Companies that skip this and rely on informal understandings are the ones that end up answering a Section 20(a) claim. The good-faith defense asks whether you actually tried to prevent violations. Hope does not qualify.

1
Office of the Law Revision Counsel. 15 U.S. Code 78j – Manipulative and Deceptive Devices
2
eCFR. 17 CFR 240.10b-5 – Employment of Manipulative and Deceptive Devices
3
Office of the Law Revision Counsel. 15 U.S. Code 78u-1 – Civil Penalties for Insider Trading
4
Office of the Law Revision Counsel. 15 U.S. Code 78ff – Penalties
5
U.S. Securities and Exchange Commission. SEC Enforcement Actions: Insider Trading Cases
6
Office of the Law Revision Counsel. 15 U.S. Code 78t – Liability of Controlling Persons
7
U.S. Securities and Exchange Commission. Rule 10b5-1 Insider Trading Arrangements and Related Disclosure
8
U.S. Securities and Exchange Commission. Forge Global Holdings – Annual Report