The former head of the collapsed Tasmanian timber company Gunns, John Gay, is facing a maximum penalty of five years in prison, after admitting to insider trading.

Gay changed his plea as his trial was about to get underway in Launceston.

The 70-year-old pleaded guilty in the Supreme Court to one charge of insider trading after selling 3.4 million Gunns shares in December 2009.

He admitted to selling the shares while in possession of information he ought to have known would affect the share price.

The information was in an October 2009 management report, which was not available to the market.

A pre-trial hearing was told the report showed Gunns had lost its entire profit margin and when the company's half yearly results were released, the share price dived by 20 cents.

Gay made $3.1 million from the sale.

The court was previously told Gay sold the 3.4 million shares after a conversation with his doctor about reducing his debt levels because he had a terminal illness.

Sentencing submissions will be heard next week.

Gay is one of the most high-profile and senior executives prosecuted by the Australian Securities and Investment Commission (ASIC).

The charge carries a maximum penalty of five years in prison, or a fine.

Shareholder activist Stephen Mayne has told ABC local radio he cannot recall another former chairman of a top ASX 100 company who has ever pleaded guilty to insider trading.

"This is as big as it gets in terms of serious players pleading guilty to insider trading," he said.

"So it's an important moment in corporate governance in Australia and interesting to see what the judge does next week."

Tony Fletcher is a former Upper House member and worked for Gunns as a lobbyist.

He says Gay always believed his actions were in the best interests of the state.

"John was a person who fundamentally believed that the forest industry was good for Tasmania," he said.

The Greens' MP Kim Booth says an independent commission of inquiry is needed to examine Gunns' dealings.

"Of whether there are other matters that ought to be investigated," he said.

Gay has been a controversial figure on the business and political landscape.

He spearheaded the massive expansion of Gunns over several years until he retired in 2010.

In 1989, he steered Gunns through scandal when its then chairman Edmund Rouse tried to bribe a Labor politician to cross the floor of Parliament, sparking a Royal Commission.

Under Gay's direction, Gunns exploded onto world markets in 2000 with takeovers which made the business one of the biggest hardwood sawmillers in the Southern Hemisphere.

In 2003, he launched his most ambitious plan, a pulp mill in Tasmania's Tamar Valley.

The proposal sparked a bitter campaign which divided the Tasmanian community.

Gay bowed to investor pressure in 2010, stepping aside as managing director. He retired from Gunns soon after.

Gunns collapsed last year owing banks more than $500 million.