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Introduction

Zhao Zenghai

Vice President of Beijing Lawyers Association

Director of JAVY Law Firm

The crime of insider trading and divulging inside information refers to persons who know the inside information of securities and futures transactions or those who illegally obtain inside information of securities and futures transactions, when they are involved in the issuance of securities, securities, futures trading, or other factors that have influence on the prices of securities and futures transactions. Before the information with significant impact is made public, buying or selling the securities, or engaging in futures trading related to the inside information, or divulging the information, or expressly or implying that others are engaged in the above-mentioned trading activities, the circumstances are serious.

Separately the author intends to introduce insider trading, the constitutional elements and defense points of the crime of divulging insider information, prosecution standards, the relationship with the administrative illegal act of insider trading, and the relationship with the crime of trading using undisclosed information, etc. This article is a series of articles on the crime of insider trading. The second chapter introduces the behavioral elements that constitute the elements of the crime.

01Behavior

According to Article 180, paragraph 1 of the Criminal Law, the crime of insider trading and disclosure of inside information includes three behaviors, namely (1) buying or selling relevant securities; (2) suggesting others to buy and sell relevant securities; or (3) Divulging inside information.

02The objective behavior of the crime of insider trading must be

The behavior under the influence of inside information

Insider information refers to information that has not yet been disclosed in securities trading activities that involves the issuer’s operations, finances, or has a significant impact on the issuer’s securities market prices. The author lists the specific legal regulations on inside information as follows for readers' reference.

According to Article 52 of the Securities Law, in securities trading activities, information that involves the issuer’s operations, finances, or has a significant impact on the market price of the issuer’s securities, which has not yet been made public, is inside information. The major events listed in the second paragraph of Article 80 and the second paragraph of Article 81 of this regulation are inside information.

According to the second paragraph of Article 80 of the Securities Law, major events include: (1) Major changes in the company’s business policy and business scope; (2) Major investment activities of the company, where the company purchases and sells major assets within one year more than 30% of the company’s total assets, or the mortgage, pledge, sale or retirement of the company’s main business assets exceeds 30% of the assets at a time; (3) The company concludes important contracts, provides major guarantees, or engages in related-party transactions , this may have a significant impact on the company’s assets, liabilities, equity, and business results; (4) The company incurs major debts and fails to repay major debts due; (5) The company incurs major deficit or major losses;(6) Significant changes in the external conditions of the company’s production and operation; (7) The company’s directors, more than one-third of the supervisors or managers have changed, and the chairman or manager is unable to perform their duties; (8) The situation of shareholders or actual controllers holding more than 5% of the company’s shares in holding shares or controlling the company has undergone major changes, and when the situation has changed greatly, the company’s actual controller and other enterprises under its control are engaged in the same or similar businesses as the company;. (9) The situation of the company's plan for dividend distribution and capital increase, major changes in the company's shareholding structure, the company's capital reduction, merger, division, dissolution, and bankruptcy decisions, or entering bankruptcy proceedings in accordance with the law, and while being ordered to close down; (10) Major litigation or arbitration involving the company, and the resolutions of the shareholders' meeting or the board of directors have been revoked or declared invalid in accordance with the law; (11) The company's suspected crimes are filed for investigation in accordance with the law, and the company's controlling shareholders, actual controllers, directors, supervisors, and senior managers are subject to compulsory measures in accordance with the law for suspected crimes; (12) Other matters specified by the securities regulatory agency of the State Council. If the controlling shareholder or actual controller of the company has a greater impact on the occurrence and progress of a major event, it will promptly notify the company in writing of the relevant information that it has learned, and cooperate with the company in fulfilling its information disclosure obligations.

According to Article 81, paragraph 2 of the Securities Law, major events include: (1) Major changes in the company’s equity structure or production and operation status; (2) Some changes in corporate bond credit ratings; (3) Major asset mortgages, pledge, sale, transfer, or scrap; (4) The company fails to pay off its due debts; (5) The company’s new borrowings or external guarantees exceeded 20% of its net assets at the end of the previous year; (6) The company gave up creditor’s rights or its assets exceeded 10% of its net assets at the end of the previous year;(7) The company has suffered major losses exceeding 10% of its net assets at the end of the previous year;

(8) The company distributes dividends, makes decisions on capital reduction, merger, division, dissolution, and application for bankruptcy, or enters bankruptcy proceedings in accordance with the law and is ordered to close down; (9) Major litigation and arbitration involving the company; (10) The company's suspected crimes are filed for investigation in accordance with the law, and the company's controlling shareholders, actual controllers, directors, supervisors, and senior managers are subject to compulsory measures in accordance with the law for suspected crimes; (11) Other matters specified by the securities regulatory agency of the State Council.

There are three characteristics of inside information. The first is importance, that is, the degree to which the information is sufficient to influence investors’ decision-making and market transaction prices; the second is relevance, that is, the relevant information is related to the issuance and trading of listed securities or its derivatives, and is related to futures transaction-related; the third is non-publicity, that is, the relevant information has not been disclosed in a statutory or prescribed manner and is not known to ordinary investors.

In addition, insider information that affects the actor's trading behavior must also be within the "inside information sensitive period". According to Article 5 of the "Inside Trading Judicial Interpretation", the insider information sensitive period refers to the period from the formation of insider information to the disclosure of insider information. Specifically, the sensitive period of inside information is the time when the "major event" occurs, and the time when the "plan", "project", "policy", "decision", etc. are formed should be regarded as the time when the inside information is formed. The initial time of the motion, planning, decision or execution of the person who affects the formation of inside information shall be deemed as the time of formation of the inside information. Disclosure of inside information refers to the disclosure of inside information in newspapers, periodicals, websites and other media designated by the securities and futures regulatory agencies of the State Council.

In practice, the defense against the absence of insider information is mainly asserted in the administrative penalty procedure of insider trading by the China Securities Regulatory Commission. In criminal defense, it is more important to defend from the fact that the perpetrator "did not use inside information", that is, the perpetrator engaged in trading activities and was not affected by the inside information. According to Article 3 of the "Insider Trading Judicial Interpretation", the relevance between insider information and trading activities is generally determined in terms of accounts, changes in funds, trading hours, trading habits, and degree of interest relevance. It should be noted that the perpetrator's objective behavior of committing the crime of insider trading only needs to be affected by insider information, and insider information is not required to be the only factor for the perpetrator to implement the relevant trading behavior.

03Insider TradingMust achieve "serious circumstances"

According to Article 6 of the "Insider Trading Judicial Interpretation", one of the following circumstances will be deemed to be "serious circumstances" as stipulated in the first paragraph of Article 180 of the Criminal Law: (1) The cumulative turnover of securities transactions is 50%. (2) The amount of margin occupied by futures trading is more than 300,000 yuan; (3) The amount of profit or loss avoided is more than 150,000 yuan; (4) Insider trading has been conducted multiple times and inside information is leaked (5) Other serious circumstances.