Last Tuesday afternoon, Elon Musk tweeted from his personal handle, “Am considering taking Tesla private at $420. Funding secured.” These words drove Tesla’s share prices up by 10% on Tuesday before Nasdaq halted trading, increasing Musk’s estimated net worth by $1.4 billion dollars.
Since then, there has been a lot of speculation about Musk’s tweet, including about whether it violated SEC rules. News outlets reported last week that the SEC has contacted Tesla to inquire as to the accuracy of the tweet, a move that could indicate the start of a more formal investigation.
While unorthodox, there may be nothing inherently wrong with Musk using Twitter to announce important news such as plans to take the company private. Since 2008, the SEC has viewed “websites” as an acceptable way of communicating with investors if investors know that they can get company information from a website and access is not restricted. In 2013, the SEC confirmed that social media, specifically, can be an appropriate way for companies to communicate information to investors, as long as the communication follows the Regulation Fair Disclosure rules. The 2013 report followed an investigation into a personal Facebook post by Netflix CEO Reed Hastings stating that Netflix’s monthly online viewing had exceeded one billion hours. Netflix had never informed investors that it would be using the CEO’s personal Facebook page for communicating investor information, and the information Hastings posted was not reported through a press release or form filing. While the SEC did not pursue action against Netflix or its CEO, it noted that disclosure of material, nonpublic information on a personal social media site of an individual corporate officer, without advance notice to investors that the site would be used for that purpose, was “unlikely” to qualify as an acceptable method of disclosure under securities laws.
That was in 2013. Today, social media is more than just a “website”; it is the source of official presidential announcements. Today, Twitter is arguably a more public way of making investor announcements than press releases or SEC filings. Musk, with his 22.3 million Twitter followers, could well argue that his tweet announcing a possible takeover of his company complied with SEC guidance and fair disclosure rules.
Beyond the form of Musk’s tweet, there’s also speculation that its content violated SEC rules. For instance, the Securities Exchange Act prohibits anyone from making false statements to drive up share prices. The Act also prohibits publicly traded companies from announcing plans to buy or sell securities if executives do not have the intent to go through with the offer, are trying to manipulate the stock price, or do not have the means to go through with the sale or purchase. Even if the tweet is technically true, omitting information material to investors could make the statement misleading and possibly violate SEC rules. Putting aside the medium that Musk used, the brevity of his statement raises the issue of whether he fully described a possibly game-changing transaction for his company. For example, who is the funding source and are they legitimate? Does Musk have the necessary commitments in hand? What are the specific covenants involved? Without some key information, the investors are left guessing and cannot fully evaluate the transaction. The 53-character tweet lends itself to a wide range of interpretation: what it actually says about the future of Tesla is still to be determined. What its impact on Tesla and Musk personally is also still to be determined.
On Monday morning, almost a week after his initial tweet, Musk seemed to answer at least some of these questions. Via a blog post titled “Update on Taking Tesla Private,” Musk explained that he has been in talks with Saudi Arabia’s sovereign wealth fund to finance a possible deal. Whether this explanation is enough to placate the SEC will be seen. All in all though, quite the hullabaloo for a little tweet.