Can Elon Musk Tweet That? The SEC Is Digging In

(Bloomberg) -- Tesla Inc. founder and Chief Executive Officer Elon Musk is facing a U.S. Securities and Exchange Commission inquiry into his bombshell tweet that he’s considering taking the company private. The regulator is likely honing in on his claim -- which Musk tried to clarify in a Monday blog post -- that he’d already secured funding for a potential buyout. Since the electric-car maker’s stock jumped after the Aug. 7 tweet, the SEC will probably want to know whether Musk was being accurate in claiming he had financing. If not, his assertion could amount to a form of market manipulation. Some investors who were caught offguard by the tweet have also questioned whether Musk might have violated the SEC’s fair-disclosure rules by releasing material information in an unconventional way. That sent securities lawyers scurrying to learn more about an obscure SEC decision known as the Reed Hastings Rule.

1. What did Elon Musk tweet?

In his initial tweet, Musk wrote: “Am considering taking Tesla private at $420. Funding secured.” It came as shares were already surging on news that Saudi Arabia’s sovereign wealth fund had built a roughly $2 billion stake in the company over the past few months. He followed that up with additional details in a series of replies to questions and other statements. The next day, Tesla’s directors said they knew about Musk’s plans days before he took to Twitter.

2. What’s wrong with his tweets?

Setting aside the question of whether announcing the news via Twitter was proper, regulators are scrutinizing Musk’s Aug. 7 declaration that he had secured funding for the move. He doubled down a few hours later when he tweeted that “Investor support is confirmed.” Almost a week later, Musk tried to clarify things in the much longer blog post. He said that ongoing discussions with Saudi Arabia’s Public Investment Fund had given him confidence to say he had lined up financing. His blog also explained that, in his initial tweet, he was “speaking for myself as a potential bidder for Tesla,” rather than as the company’s CEO. The SEC will presumably dig into Musk’s communications with the Saudi sovereign wealth fund and ask why it took him so long to provide more details for confused shareholders.

3. What is the Reed Hastings Rule?

The SEC first ruled on the use of social media for disclosing material information after Netflix Inc. CEO Reed Hastings wrote in a July 2012 Facebook post that views on his company’s video-streaming service had “exceeded 1 billion hours for the first time.” The regulator later determined that Hastings wouldn’t face enforcement action and declared most social media “perfectly suitable” for communicating company information as long as investors are alerted and access isn’t restricted. Musk has often used Twitter as a means of communicating information about his companies.

4. What is Regulation FD?

The SEC rule aims to promote “full and fair disclosure” of corporate information by requiring a level playing field for announcements of material nonpublic information. The rule was initially adopted in 2000, before the rise of social media. The agency modified its view of permissible venues with its 2013 decision not to act against Netflix’s Hastings. The SEC hasn’t responded to requests for comment on Musk’s tweets.

5. So did Musk violate the rules?

Keith Higgins, a partner at the Ropes & Gray law firm who formerly led the SEC’s corporation finance unit, said Musk’s tweet could amount to market manipulation if he didn’t really have financing secured and wasn’t ready to make a bid. “He could be in big trouble if that turns out not to have been true,” Higgins said. Even if the SEC and regulators in Delaware -- where the company is registered -- remain at bay, Musk will still have to fend off angry investors. Several shareholders filed suit on Aug. 10 accusing him and Tesla of manipulating the company’s stock price.

The Reference Shelf

  • The SEC’s Regulation FD
  • A Bloomberg News article about Reed Hastings’ brush with the SEC over a Facebook post.

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