When it comes to Employee Stock Purchase Plans (ESPPs), few topics create as much uncertainty as insider trading and blackout windows. While most equity plan professionals can easily explain the rules for option exercises or RSU releases, ESPPs live in a murkier zone that blends administrative practicality with legal interpretation.
This article breaks down the gray areas, clarifies where the risks truly lie, and provides best practices to help your organization stay compliant while maintaining broad-based employee participation.
The General Rule: What Insider Trading Laws Prohibit
Under U.S. securities laws, employees who have access to material nonpublic information (MNPI) are prohibited from buying or selling company stock while in possession of that information.
Most companies reinforce this through insider trading policies that establish blackout periods around:
- Quarterly earnings announcements
- M&A or financing activity
- Material product launches or other market-sensitive events
At a high level, any purchase or sale of company securities can fall under those restrictions. But how do these rules apply to an ESPP, especially when participation is automatic and ongoing?
Key Questions Companies Face
In practice, issuers and administrators often grapple with three common questions:
- Does enrolling in an ESPP count as an investment decision?
- Are participation changes (like starting, stopping, or adjusting contributions) also considered investment decisions?
- What happens when a scheduled purchase occurs during a blackout period?
These questions are not just theoretical—they have real implications for compliance, employee experience, and communication strategy.
What Practice Shows: Why ESPPs Are Treated Differently
While blackout periods can limit when employees may sell or transfer ESPP shares, they rarely impact enrollment, contribution, or purchase dates.
Here’s why: when employees acquire shares directly from the issuer rather than on the open market, the transaction typically doesn’t raise insider trading or Rule 10b5-1 concerns. The company, not the market, is the counterparty, and the purchases occur under a predetermined, nondiscretionary plan.
From a U.S. legal perspective, that means regularly scheduled purchases under a qualified ESPP are generally viewed as low risk.
However, gray areas persist, particularly for companies that:
- Have extended blackout periods, or
- Employ participants who regularly possess MNPI (for example, in finance, legal, or strategy roles).
Issuer vs. Open Market: Why Purchase Method Matters
| Purchase Method | Insider Trading Risk | Notes |
| From the issuer (newly issued shares) | Low | Standard for qualified ESPPs; purchases are automatic and nondiscretionary |
| Open market purchases | Higher | Employees effectively trade in the market and may be aware of MNPI |
Companies using open-market ESPPs often take a more conservative stance, aligning enrollment and participation changes with open trading windows to reduce perceived risk.
Practical Steps for Issuers
To balance compliance with accessibility, companies should:
- Confirm with Legal Counsel
Ensure your insider trading policy clearly addresses ESPP enrollment, contribution changes, and purchase activity. - Document the Rationale
Keep records explaining why certain plan features—such as purchase timing or blackout treatment—are compliant, especially for open-market plans or global participants. - Communicate Early and Often
Clarify to employees how blackout periods affect their ESPP participation: purchases may proceed, but sales remain restricted. - Adjust Enrollment Windows When Needed
If a blackout overlaps an offering start date, extend the window so all employees can participate equitably. - Educate Insiders
Reinforce that while purchases may be automatic, selling ESPP shares during blackout periods remains prohibited.
The Bottom Line
ESPPs are designed to build long-term ownership, not to enable short-term trading. For most companies, regularly scheduled purchases from the issuer present minimal insider trading risk, but clarity and consistency are key.
A well-documented policy, paired with clear communication and training, ensures compliance while preserving the spirit of broad-based ownership that ESPPs are meant to foster.
Need help refining your company’s ESPP policies or employee communication strategy? Infinite Equity’s experts partner with public and private companies to build clarity, confidence, and compliance across every aspect of equity compensation. Contact us to ensure your ESPP is structured and communicated for maximum participation and minimal risk.
