The following is not meant to be legal advice.
Insiders often hold large amounts of stock in their own companies that their personal investment portfolios are inadequately diversified. Like other employees, insiders are people first, and may justifiably want to sell company stock for personal reasons such as the purchase of a house, education, care of a parent.
However, these insiders often possess material, nonpublic information that prevents them from selling company stock. They are the ones who know when a merger is going on, what the significant deals. Before the material information is disclosed to the public, if insiders were to trade on such information, they would open themselves up to criminal and civil charges of illegal insider trading and market manipulation.
The Securities Exchange Commission (SEC) promulgated Rule 10b5-1 to allow an insider to trade when he/she is not truly engaged in manipulating the market, even if the insider possesses material, nonpublic information at the time of a trade. Under Rule 10b5-1, the insider may trade if the trade occurs automatically according to a pre-determined plan established before the insider ever possessed the material inside information.
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