Step away from the phone! That’s the message Elon Musk, the now former Chairman of Tesla and habitual Twitter user, should have heeded in August before he sent one of his latest ill-advised tweets. Unfortunately, Musk let his critics (this time the short sellers of Tesla’s stock) get the better of him, and now Tesla and Musk are paying a high price for what amounts to an off the cuff remark.
The background, as you may recall, is that back in August, Musk tweeted that he was contemplating taking Tesla private at $420 per share and that he had “funding secured.” Of course, as it was later discovered the $420 per share price was only loosely based on a financial model or expected financial performance of Tesla. Rather, the SEC claims the price had more to do with impressing his girlfriend. And the “funding secured” part had very little basis in reality either.
As a general matter, I would recommend against launching a going private transaction via tweet. The SEC seems to agree. On September 29, 2018, Musk and Tesla quickly settled an SEC lawsuit by Musk agreeing to step down as Chairman of Tesla for at least three years, each of Musk and Tesla paying a $20 million fine (to be distributed to harmed stockholders), Tesla agreeing to add two new independent directors to its Board, and Tesla agreeing to put in place new controls to review all social media communications of Tesla’s senior management, including company pre-approval of all Musk social media postings that may contain material nonpublic information. The penalty is fairly harsh, but it is actually more mild than was originally intended – the SEC’ s lawsuit sought a bar from Musk serving as a director or an officer of a public company.
Given that Musk and Tesla settled the lawsuit two days after it was filed, Musk and Tesla must have believed that the SEC would not go away quietly or quickly. The SEC clearly used a lawsuit against an outspoken Musk to curb his appetite for Twitter and to warn others. Thus, this is probably a good time to review the “lessons learned” here.
Ten years ago, the SEC addressed this issue. Technology evolves, but the principles remain the same. The SEC was very clear in its interpretive release that the “antifraud provisions of the federal securities laws apply to company statements made on the Internet in the same way they would apply to any other statement made by, or attributable to, a company.” This really isn’t that hard to understand. So, in other words, if an issuer published a letter on its website flippantly claiming it would be going private, the issuer would be liable. A tweet by a company’s Twitter account would have the same effect.
And, of course, the 2008 SEC guidance was also very clear that statements published on websites “attributable to” an issuer would also be subject to the antifraud provisions of the securities laws. The SEC gave further guidance in 2013 as to what “attributable” might mean after the Netflix CEO released material nonpublic information on his personal Facebook page. The 2013 guidance made it clear that if an issuer expects to use different channels for distributing material nonpublic information, it must provide notice to investors. Tesla, in a Form 8-K filed in 2013, notified investors that material nonpublic information would be distributed through Musk’s Twitter account. Thus, Tesla would have found it very difficult to argue that the Musk tweet was not attributable to Tesla.
In hindsight maybe it all looks obvious. If an issuer has claimed it may issue material nonpublic information through a specific channel (in this case through Musk’s Twitter account), then doesn’t bother to monitor the disclosures in substantially the same way as any other official disclosure such as a press release, periodic report, or website, why wouldn’t this failure be a failure of the issuer’s disclosure controls? Yes, Twitter is a very informal method of communication, but if an issuer elects to disclose information in this channel, then the issuer needs to review and evaluate the disclosures via Twitter just as it would review and evaluate any other official issuer disclosures.
Is reviewing each Twitter post unworkable? Probably. Best approach: don’t ever disclose material nonpublic information through Twitter. Musk should stick to announcing new car colors via Twitter and let his IR and legal teams handle the material disclosures!