By: Michael Farmer
On August 7, 2018, Elon Musk infamously boasted that he had secured funding to take Tesla, his automobile company, private.[1] This tweet was shared 16,004 times, liked 87,941 times, and seen by even more.[2] Following the buzz created by this statement, Tesla’s stock shot up six percent just a few hours after the tweet.[3] The Securities and Exchange Commission (hereinafter “SEC”) launched an investigation soon after.[4] Although a settlement was ultimately negotiated, one question remains: When is a tweet no longer a tweet, but rather a CEO’s official statement on the direction of a $61 billion company?
Twitter has become a way for companies to communicate with the public in an official capacity.[5] Twitter’s development is not unlike the development of websites as a source of information in the mid-to late 1990s, which sparked the SEC to draft Regulation Fair Disclosure (“Regulation FD”) in August 2000.[6] Regulation FD addresses how an issuer discloses material or nonpublic information to shareholders when the issuer could reasonably believe that shareholders will trade on that information.[7] Regulation FD is designed to prevent those privileged with the means of receiving this information from gaining over those who are not.[8] More specifically, it aims to prevent those who were internet savvy from benefitting over shareholders who were not.[9]
A similar issue in 2012 provides insight into the application of Regulation FD. After an investigation into Netflix, Inc. and CEO Reed Hastings in 2012, the SEC issued further guidance on Regulation FD.[10] The SEC concluded that social media sites are strikingly similar to the websites that originally brought the update to Regulation FD in 2008, and, because of that fact, the same level of scrutiny must be applied to the evolving social media channels.[11] As a result, social media is deemed an acceptable form of disseminating information as long as shareholders and market investors will know when and where to look to receive it.[12]
It is necessary to apply the results of the Netflix, Inc. investigation to Musk’s case. Notably, Musk’s tweet quickly went viral.[13] To have passed Regulation FD analysis, Musk must have shown that he informed all shareholders, including those without Twitter accounts, of the contents of his tweet.[14] Once it was discovered that Musk did not notify the public through any other means and the funding mentioned in the tweet was not actually secured, the SEC had no choice but to intervene.[15] Citing the market disruption, the SEC fined Tesla and Musk separately.[16] Musk was charged with securities fraud for authoring the tweet, and Tesla was charged with “failing to have required disclosure controls and procedures relating to Musk’s tweets.”[17]
From a legal standpoint, it is rather clear that Musk’s tweet did not stand up to Regulation FD analysis. Although Musk was charged a hefty penalty fee, Tesla’s stock shot up both after the tweet and after the settlement.[18] Down ticks throughout the investigation aside, Tesla’s stock price after the settlement ended up at a higher price than it was before the tweet.[19] Musk may be ousted as Chairman for the next three years, but it seems his tweet may have generated enough buzz to keep consumers in a frenzy for anything Tesla related.
[1] Elon Musk (@elonmusk), Twitter (Aug. 7, 2018, 11:48 AM), https://twitter.com/elonmusk/status/1026872652290379776?lang=en.
[2] Id.
[3] Press Release, SEC, Elon Musk Settles SEC Fraud Charges; Tesla Charged With and Resolves Securities Law Charge (Sept. 29, 2018), https://www.sec.gov/news/press-release/2018-226.
[4] Id.
[5] See Lahle Wolfe, Things to Consider About Using Twitter For Business, Women in Bus. (Aug. 5, 2018), https://www.thebalancecareers.com/using-twitter-for-business-3515346 (noting the benefits of customer engagement through Twitter and other social media).
[6] 17 C.F.R. § 243 (2018).
[7] Investigative
Report, SEC, Report of Investigation Pursuant to Section 21(a) of the
Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings (Apr. 2,
2013), https://www.sec.gov/litigation/investreport/34-69279.pdf.
[8] Id.
[9] See id.
[10] Id.
[11] Id.
[12] Id.
[13] Timothy B. Lee, SEC Settlement Sends Tesla Stock Soaring, Ars Technica (Oct. 1, 2018, 11:39 AM), https://arstechnica.com/cars/2018/10/tesla-stock-soars-as-musk-taunts-the-sec-with-a-tweet/.
[14] 17 C.F.R. § 243
(2018); Investigative Report, SEC, Report of Investigation Pursuant to Section
21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings
(Apr. 2, 2013), https://www.sec.gov/litigation/investreport/34-69279.pdf.
[15] See Liz Moyer, Securities Lawyers Shocked by Elon Musk’s Tweet, Point to Potential Legal Minefield, CNBC (Aug. 7, 2018, 4:02 PM).
[16] Press Release, SEC, Elon Musk Settles SEC Fraud Charges; Tesla Charged With and Resolves Securities Law Charge (Sept. 29, 2018), https://www.sec.gov/news/press-release/2018-226 (stating that Musk will be fined $20 million and Tesla another $20 million to satisfy harmed investors).
[17] Id.
[18] Id.
[19] Lee, supra note 12.
