Dow Jones 10139.71 +10.47 1:00 pm PST, July 30, 2004  NASDAQ 1887.36 +6.30 For info, visit access.smallcapnetwork.com S & P 500 1101.71 +1.28 To be removed, please click here Russell 2000 550.93 +1.10 VOLUME 04: ISSUE 59  Feature: Insider selling. Rarely a big deal. "Great company, but what about all the insider selling?" is a relatively common refrain populating my email box. Relax. Insiders are people too. By definition, SmallCap companies don't have a lot of dough. To attract the best people, company stock and/or options--usually the stock is restricted from sale for at least a year-- are routinely offered or given to round out a compensation package. In some cases, especially in companies in their formative stages, the officers and directors may take virtually no cash compensation and instead receive stock in lieu. As well, people that have acquired shares from the company for financing or other corporate services need to sell, eventually.  Are these folks who have taken a significant personal financial risk supposed to never sell? Give yourself a shake. Here's some fodder for thought: Bill Gates sells the maximum stock he is allowed every quarter and has done so for years and years. Does that mean he is concerned about Mister Softee's future? Ah, no. To ensure that massive amounts of insider, or control (ownership of greater than 10 percent of the issued stock) stock, doesn't hit the market willy-nilly, there is the ubiquitous--some wags would say infamous--Rule 144. Taking stock in the SEC Insider and control stock is, in the majority, restricted from sale when acquired directly from a company or it's affiliate. We'll get into that in a moment, as well as other conditions necessary for sale under Rule 144. The good folks at the Securities and Exchange Commission state: "Investors typically receive restricted securities through private placement offerings, Regulation D offerings, employee stock benefit plans, as compensation for professional services, or in exchange for providing "seed money" or start-up capital to the company." "Control means the power to direct the management and policies of the company in question, whether through the ownership of voting securities, by contract, or otherwise." Although we'll merely hit the highlights on insider selling, you'll want to read the definitive SEC rules here: http://www.sec.gov/answers/rule144.htm .  To be able to sell previously restricted shares, a number of conditions must be present to ensure both fairness as well as minimal impact on the market. Rules, Rules, Rules. Before one sells or seeks an exemption to sell restricted investor stock, the seller must file a form 144, but only after the following points have been satisfied: The shares in question must have been held for at least one year. After the one-year holding period, the number of shares you may sell during any three-month period can't exceed the greater of 1% of the outstanding shares of the same class being sold, or if the class is listed on a stock exchange or quoted on NASDAQ, the greater of 1% or the average reported weekly trading volume during the four weeks preceding the filing a notice of the sale on Form 144. Over-the-counter stocks, including those quoted on the OTC Bulletin Board and the Pink Sheets, can only be sold using the 1% measurement.  The company's SEC corporate filings must be up to date. Normal commissions need be paid. At the time you place your order, you must file a notice with the SEC on Form 144 if the sale involves more than 500 shares or the aggregate dollar amount is greater than $10,000 in any three-month period. The sale must take place within three months of filing the Form and, if the securities have not been sold, you must file an amended notice. Once the restriction has been lifted, the seller must get the "restricted" legend removed from the share certificate. Once the eventual sale transaction is completed, a Form 4 must be filed with relevant detail. The above only applies to stock received from a company or affiliate for the reasons noted. Purchases made by affiliates or control groups in the open market do not require the full Rule 144 treatment--specifically the holding period. The other conditions for sale do apply. As far as stock options are concerned, the restriction timer kicks in once the options have been exercised and not the date they were granted. Once a Form 144 has been filed and accepted--which can take 2-4 weeks, the seller has 90 days to sell or must file an amendment should that period lapse. Filing and refilling a Form 144 is standard practice, especially with SmallCaps. One may well look at the Insider Transaction section on Yahoo and seem a bunch of entries called 'Planned Sales". That characterization doesn't mean the shares have been sold--there's not even any hint as to whether they will be or not. The time-consuming practice of freeing up restricted stock is merely to allow those who need to file a Form 144 the flexibility to sell in the future should they so choose.  The roof is leaking... So, if the director or officer et al of a SmallCap company finds he/she needs a new roof, tuition for a child or a new car and doesn't make the cash through salary, he/she can ensure shares that have met the SEC criteria are available for sale by filing a Form 144. Like the rest of us, he/she may want the ability to sell at hand rather than have to wait the standard 2-4 weeks for approval, especially if there is a critical personal situation. In a lot of cases, an insider will file a Form 144 to have a restriction removed so that the shares can be used as collateral to buy more shares. Most companies will go the extra step of ensuring by company policy that the timing of a sale by insider or related parties doesn't occur around or prior to the announcement of earnings or other material events. There is usually--or should be--an attorney or compliance officer's blessing prior to either purchase or sale both for legal reasons and transparency to shareholders. Sure, we'd like to see lots of insider purchases within the stocks we own. But be confident that for the vast, vast majority of insiders and affected others, the SEC rules ensure that sales will be fair, open and transparent to the other shareholders and the marketplace. The time to be concerned is if you see an insider list where the appropriate parties have filed to sell all or large portions of their shares. Otherwise, don't be too quick to condemn. The reasons for sale, I would submit are, for the most part, likely more mundane and personal than any material or editorial comment on the company's prospects.    We Value Your Feedback Got comments, questions or suggestions? Send 'em on over: Editor@smallcapnetwork.com If you wish to send a written request or inquiry, please send it to our physical address: TGR Group, LLC 3525 Del Mar Heights Rd #334 San Diego, CA 92130 Unsubscribe Here D I S C L A I M E R : The SmallCap Digest is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. SmallCap Digest is not a registered investment advisor or broker-dealer. 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