Five questions to ask if you’re considering a 10b5-1 selling plan

The corporate executives we advise often hold a significant portion of their wealth in their own company stock. The accumulation of company stock can happen naturally due to the nature of executive compensation structure, as well as restrictions or other concerns around selling stock that pertains to insiders.

1. How much is too much?

Technically speaking, single positions representing 10% or more of your total portfolio are considered to be a concentrated position. Holding a concentrated position can translate into greater portfolio volatility, which has been shown to reduce compounded growth rates and future wealth. In addition, single stock concentration introduces risk for which the investor is generally not compensated. If you’re a corporate officer, and you haven’t yet considered a 10b5-1 selling plan, it may make sense to learn more about its potential benefits.

2. What is a 10b5-1 Selling Plan?

Rule 10b5-1 was established by the Securities and Exchange Commission (SEC) to allow insiders of publicly traded corporations to establish a trading plan (10b5-1 Selling Plan; Selling Plan; Plan) to sell a predetermined number of shares of company stock at a predetermined time. A Selling Plan typically exists as a contract between the person who owns the shares and their Investment Advisor. A 10b5-1 Plan is passive in the sense that once it is established, discretion regarding sales execution within the parameters of the plan is granted to the Investment Advisor. In addition to SEC rule 10b5-1, company guidelines and other securities laws must be honored when constructing a Selling Plan. For example, a company may require a waiting period between the adoption of a Selling Plan and the first sale under the plan. And though it may be obvious, it’s worth stating that Selling Plans must also comply with the volume limitations of Rule 144.

3. How does Jackson Square Capital help Executives who’d like to diversify out of concentrated equity positions?

We are an experienced team, with the resources and knowledge to write and implement your Selling Plan. We handle everything, including:

• Drafting the Plan and reworking it based on any Company feedback
• Executing sales as laid out in the Plan
• Reporting sales to both the Company and the SEC on your behalf

The points above are not overly difficult or complicated, but our experience with Selling Plans and advising executives gives us the perspective to advise on Plans in the larger context of your overall portfolio and your long-term goals. We are particularly well-equipped to add value by reinvesting proceeds in a way that makes sense for you. Every client is different, but common factors we consider include:

1. How far along are you in your career?
2. Do you have any large upcoming expenses?
3. Do you have any estate planning considerations?
4. What does the rest of your portfolio look like?
5. How long do you expect to be with your current company?
6. Does your company have mandatory ownership minimums?
7. What is the average trading volume for your company’s stock?

Our approach is to map out a long-term plan, which includes two parts:

One. We work with you to construct a selling plan and have it approved by your Company’s legal team. We are responsible for implementing the plan, which includes making sales at the agreed-upon levels and limits, as well as complying with Company and regulatory reporting requirements. Generally, plans can be written and formally adopted in a two-week timeframe. Note for officers and affiliates, adoption needs to occur during an open trading window.

Two. We help you build your long-term wealth by putting sale proceeds to work in one of our tested strategies. This is where a lot of firms fall short, and where we can add unique value. All of our client’s accounts are separately managed, and take into account your unique cost basis and market conditions at the time new funds are added. We do not run a fund, and as a result, we are able to manage your individual accounts in a comprehensive manner that includes the knowledge of your selling plan, recent sales under the plan, as well as concentrated holdings.

4. What potential benefits can you expect from a plan?

Consider a hypothetical world in which Roger Smith has been serving as an executive at ABC Corporation for four years and has accumulated a significant holding of ABC stock. He has been doing a spectacular job as CTO and the company has been growing rapidly. He holds 215,000 shares, priced at $45 per share, and he understands the benefits of diversification.

Roger’s Jackson Square team works with him to figure out parameters for his Selling Plan. They agree on selling 50,400 shares over twelve months. This amounts to 4,200 shares per month, well under the volume limitations of Rule 144 since ABC Corporation is a heavily traded stock. Roger has expressed not wanting to let go of the stock below its current level, so the plan is written with a limit of $45. Roger, the Company and Jackson Square all sign off on the plan that Jackson Square drafts. After an initial cooling off period, monthly sales commence.

Each month during which a sale takes place, proceeds are invested according to his risk, constraints and goals, with a portion set aside to pay taxes at year-end.

5. The bottom line: Why does a Selling Plan make sense?

Immediately you can rest assured knowing that together, we’ve put a sensible strategy in place and you’re backed by a team equipped to execute that strategy.

Over time, your portfolio will become healthier as you diversify out of the heavily weighted position. We can write a plan that spans any length of time, but typically we recommend a twelve-month plan. If you receive stock-based compensation, it may make sense to have a new plan in place to coincide with the expiration of your initial plan.

Looking for additional ways to get the most out of your concentrated position? In addition to 10B5-1 Plans, we can advise on the following strategies:

Grantor Retained Annuity Trust (GRAT)
Charitable Remainder Unitrust (CRUT)