Short Sale
A short sale involves selling borrowed securities with the intention of buying them back at a lower price. Section 16(c) of the Securities Exchange Act prohibits company insiders from short selling their company's stock, ensuring they can only profit from price increases.
The Trader's Take
The Signal
The short sale prohibition means insiders are structurally aligned with long-term shareholders—they cannot bet against the company.
The Noise
N/A - This is a structural prohibition, not a trading signal.
Actionable Insights
- 1Insider purchases are more meaningful because they cannot hedge with short positions.
- 2The prohibition ensures CEO/CFO interests are aligned with stock appreciation.
- 3Understanding this rule helps interpret why insider buys are bullish signals.
- 4Violations of Section 16(c) can result in disgorgement and penalties.
Regulatory Context & Context
Short Sale vs Transaction Code S
Short Sale
A short sale involves selling borrowed securities with the intention of buying them back at a lower price. Section 16(c) of the Securities Exchange Act prohibits company insiders from short selling their company's stock, ensuring they can only profit from price increases.
Transaction Code S
Transaction Code S on Form 4 indicates an open market sale of securities. This is when an insider sells company stock on a public exchange at market prices, which can signal various things depending on context.
Common Misconceptions
The prohibition is automatic—no intent to manipulate is required for a violation.
Short sales against the box (owning long shares while shorting) are also prohibited.
The rule applies even during periods when the insider has no material non-public information.
Frequently Asked Questions
Can insiders short sell their company stock?
No. Section 16(c) of the Securities Exchange Act prohibits officers, directors, and 10% beneficial owners from short selling their company's stock under any circumstances.
What happens if an insider shorts their stock?
Violations of Section 16(c) can result in disgorgement of profits, civil penalties, and SEC enforcement actions. Any profits from prohibited short sales must be returned to the company.
What is the difference between selling and short selling for insiders?
Regular sales (disposing of owned shares) are allowed and reported on Form 4. Short sales (selling borrowed shares to profit from price declines) are prohibited under Section 16(c).