On August 7, 2018, the usually cluttered Twitterverse was interrupted with the following tweet from Elon Musk:
Posting tweets containing false and misleading statements about anything noteworthy pepper the Twitterscape every second and are just a part of life on the app. However, this tweet was different. This particular tweet and subsequent tweets elaborating on the initial tweet had come from Elon Musk on the verified Twitter account of the CEO of Tesla, Inc. Those who have followed Elon Musk’s journey as CEO of Tesla are aware of his detest for and ongoing battle with short-sellers in Tesla, an SEC reporting company.
After the infamous tweet on August 7th, many practitioners within the industry, including myself, knew it was only a matter of time before the other shoe fell and the SEC came calling. On September 27, 2018, news broke that the SEC was suing Mr. Musk for making false and/or misleading statements in those tweets on August 7th. In its complaint, the SEC stated the following:
"Musk knew or was reckless in not knowing that each of these statements was false and/or misleading because he did not have an adequate basis in fact for his assertions. When he made these statements, Musk knew that he had never discussed a going-private transaction at $420 per share with any potential funding source, had done nothing to investigate whether it would be possible for all current investors to remain with Tesla as a private company via a 'special purpose fund,' and had not confirmed support of Tesla's investors for a potential going-private transaction."
Isn’t Mr. Musk allowed to give his opinion?
As an SEC reporting company, Tesla is subject to the SEC’s rules regarding what it discloses to the public. Rule 10b-5 prohibits any act or omission resulting in fraud or deceit in connection with the purchase or sale of any security. As the CEO of an SEC reporting company, Elon Musk is barred from making any public statement that would be considered untrue or misleading due to the effect it has on investors in Tesla’s securities. The SEC has alleged that Elon Musk’s tweets on August 7th contained misstatements of material facts that would be subject to SEC action.
Were Mr. Musk’s tweets considered public disclosure?
In 2013, the SEC made clear that companies can use social media outlets like Twitter to announce key information in compliance with Regulation FD. As a CEO of an SEC reporting company, a reasonable investor could believe that tweets being sent from Elon Musk’s verified Twitter account would represent announcements from Tesla itself.
Members of management of SEC reporting companies need to ensure they are aware of methods that would be considered public disclosure and the limits of what they are allowed to disclose. These rules can be complex and require someone with expertise in SEC reporting. Business Legal Advisors, LLC has over seven years of experience representing companies subject to SEC reporting rules and can assist companies with proper disclosure to the investing public.
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