6.3.2. Insider Trading: Rule 14e-3
As we have discussed, the Exchange Act prohibits fraudulent, deceptive, or manipulative practices in connection with tender offers. The SEC deems insider trading—the purchase or sale of a security on the basis of material, nonpublic information—to be one such naughty practice, and Rule 14e-3 expressly prohibits insider trading in the context of tender offers.
The rule states that any person other than the bidder who possesses material, nonpublic information about a tender offer may not trade on that information if she knows or has reason to know that it was acquired from (1) the bidder; (2) the target company; or (3) any employee, director, officer, or person acting on behalf of the bidder or the target. The prohibition applies as soon as any person “has taken a substantial step or steps to commence” a tender offer; trading on the information before the tender offer actually begins is banned. If the information in question is made public, however, the person may trade on the information after the passage of a “reasonable time,” defined by the SEC as at least two business days.
Not only does the rule prohibit trading on material, nonpublic information, it also prohibits the bidder, the targ