A technique, sometimes called a same-day sale, that allows an employee to exercise his stock options without having to pay cash to cover the exercise price. The employee delivers a notice to exercise the option together with instructions to sell some or all of the shares acquired on exercise, including the sale of enough shares to cover the cost of the exercise price. The company delivers the shares to a broker who sells enough shares to cover the cost of the required tax withholding and broker's commissions, as well as the exercise price. The balance is paid to the employee in shares or in cash, per the employee's notice.

When the Sarbanes-Oxley Act of 2002 (the Act) was enacted, there was some uncertainty whether this technique would result in the kind of personal loan to executive officers and directors that the Act prohibits. Many practitioners have concluded that the cashless exercise does not violate the Act. Therefore, many companies continue to permit this method of exercise, even for their executive officers and directors. However, some other companies take a more conservative approach and prohibit their executive officers and directors from using this exercise method.

A cashless exercise involves a sale of equity securities which must be reported by Section 16 insiders on Form 4. The shares sold can be matched against other purchases and sales and therefore can result in liability under Section 16(b) of the Securities Exchange Act of 1934, as amended, if the insider has a non-exempt purchase or sale within six months before or after the cashless exercise. For more information on Section 16(b) and short-swing profit liability, see Practice Note, Section 16(b) Short-swing Profit Liability: The Perils of Turning a Quick Profit. For more information on Section 16 reporting, see Practice Note, Section 16 Reporting: Why, How and When to Do It. For a summary of common events that trigger a Form 4 filing, see Form 4 Filing Checklist.