DEFINITION of Form 3

Form 3 is a document that a company insider or major shareholder must file with the Securities and Exchange Commission (SEC). An insider can include a director or senior officer of a company, as well as any person or entity that beneficially owns more than 10% of a company's voting shares.

Form 3 is an important step in helping regulate insider trading, which is an individual’s buying or selling of a security, based on material nonpublic information. Filing Form 3 helps to disclose who these insiders are and track any suspicious behaviors.

BREAKING DOWN Form 3

The company insider must file Form 3 with the SEC no later than 10 days after she or he becomes affiliated with a company, and it must be filed for each company in which a person is an insider, regardless of whether or not the insider has an equity position in the company at that time.

Form 3 is also affiliated with SEC Forms 4 and 5, along with the Securities Exchange Act of 1934 (SEA). The SEA was created to govern securities transactions on the secondary market, following their initial issue, to ensure greater financial transparency and less fraud.

While Form 3 is the initial filing is on Form 3, Form 4 is for changes in ownership. These must be reported to the SEC within two business days although limited categories of transactions not subject to this reporting requirement. Insiders must file Form 5 to report any transactions that should have been reported earlier on a Form 4 or were eligible for deferred reporting.

The SEC adopted new rules and amendments to Section 16 of the Securities Exchange Act in August 2002 in accordance with the provisions of Sarbanes-Oxley, which accelerated the deadline for filing many reports of insider ownership.

Form 3 and Other SEC Forms

In addition to Forms 3, 4, and 5, several other important SEC forms exist. For example, companies must file Form 10-K, an annual report that contains a comprehensive summary of their performance. A 10-K generally includes five distinct sections:

  • Business details, including company’s main operations, products, and services

  • Risk Factors that outline any and all risks the company faces or could face in the future, typically listed in order of importance (Examples include the risk of defaulting on loans or the risk of new regulations that hinder progress.)

  • Selected Financial Data, one of the most important sections for research analysts, that detail specific financial information about the company over the last five years

  • Management’s Discussion and Analysis of Financial Condition and Results of Operations, known as MD&A, which refers to qualitative information that accompanies the financial statements (This gives the company an opportunity to explain its business results from the previous fiscal year.)

  • Financial Statements and Supplementary Data, which includes the company’s full audited financial statements, including the income statement, balance sheets and statement of cash flows.

Together, all SEC filings are important sources of information for anyone considering an investment in a company.