Section 16 of the Securities Exchange Act of 1934, as amended (Exchange Act), imposes specified reporting obligations, and Exchange Act Section 16(b) imposes potential liability, on certain directors, executive officers, and 10% stockholders of certain reporting companies. After a company becomes a reporting company registering a class of equity securities under Section 12(b) or 12(g) of the Exchange Act, Section 16 of the Exchange Act imposes additional obligations on certain directors, officers, and 10% stockholders of the reporting company (often referred to as Section 16 insiders).

Under Section 16(a), a person who is a Section 16 insider must report such person's initial ownership of the company's equity securities, including derivatives such as stock options, warrants, rights and other convertible securities, after an initial triggering event (see Practice Note, Section 16 Reporting: Why, How and When to Do It: Form 3) and any changes in the amount of securities owned after that first filing (see Practice Note, Section 16 Reporting: Why, How and When to Do It: Form 4 and Form 5).

Section 16(b) imposes strict liability on Section 16 insiders for realizing profits from purchase and sale transactions (or sale and purchase transactions) relating to a reporting company's equity securities in any period of less than six months. If a Section 16 insider is found liable, Section 16(b) requires the Section16 insider to turn over any net profits from the transactions (calculated in the specific manner required for Section 16(b) transactions) to the company. However, some types of transactions are excluded from the liability provisions or the net profit calculation and may also be excluded from the more rigorous Section 16(a) reporting requirements. For more information on short-swing profit liability, see Practice Note, Section 16(b) Short-swing Profit Liability: The Perils of Turning a Quick Profit.

Section 16(a) of the Exchange Act requires disclosure of beneficial ownership of a reporting company's equity securities (see Practice Note, Section 16 Reporting: Why, How and When to Do It: What is Beneficial Ownership?) by:

These persons are subject to more scrutiny because they are presumed to have inside information about the company, and even the appearance that they are trading on the basis of inside information is perceived as a violation of the public's interest in fair and regulated trading markets.

However, Section 16 is only applicable to companies that have registered a class of equity securities under Section 12(b) or Section 12(g) of the Exchange Act. Section 16 is not applicable to companies that have reporting obligations only under Section 15(d) of the Exchange Act or that have registered only debt securities under Section 12.

For additional information on what information needs to be reported under Section 16, preparation of Section 16 reports, when and how to file Section 16 reports, Section 16 compliance programs, filing and the consequences of failing to file Section 16 reports, and the termination of obligations under Section 16, see the Practical Law resources linked at the end of this Toolkit and Practice Note, Section 16 Reporting: Why, How and When to Do It: What Information Must Be Reported?, Preparing Section 16 Reports, Compliance Programs, Failure to File Section 16 Reports, and Termination of Section 16 Obligations.

Links to Practical Law resources on Section 16 appear below.