By Jack Igoe*
On September 27, 2018, the Securities and Exchange Commission (SEC) filed a complaint in a United States District Court for the Southern District of New York, alleging that Elon Musk, CEO and Chairman of Tesla, issued false and misleading statements to investors.[i]Whereas statements containing investor information are traditionally filed through more formal means, Mr. Musk’s statements were issued via his personal Twitter account.[ii]This forum presents interesting new challenges to the world of financial regulation and litigation more broadly.
Twitter has seen exponential growth in monthly active users. Since 2010, Twitter has grown from thirty million monthly active users to more than three hundred and twenty-six million users in 2018.[iii]This boom in user growth has led several company executives to adopt the platform as an easier way to get their firm’s message out to consumers and investors. Influential executives such as Tim Cook and Bill Gates have used Twitter to market their firm’s products and engage with consumer bases.[iv]However, these advances in technology and ease of communication have also led to a challenging new area of regulation for agencies such as the SEC tasked with protecting investors.
In its case against Tesla, the SEC gave particular significance to an August 7th, 2018 tweet from Elon Musk which read “Am considering taking Tesla private at $420. Funding secured.”[v]This message was conveyed to Elon Musk’s twenty-two million followers, some of whom were presumably shareholders.[vi]In response to that tweet, Tesla’s publicly traded stock rose 10% by the close of the markets on August 7th.[vii]The transition of a publicly traded company to private ownership frequently involves a windfall for current shareholders. In Tesla’s case, shareholders on August 7th would have had the option to sell their current shares at a $41 market premium or retain the shares as the firm went private. These options were conveyed to shareholders in a follow-up tweet to Musk’s August 7th tweet.[viii]
The SEC responded by opening up an investigation and subsequently alleging that Musk’s statements violated Section 9 of the Securities Exchange Act of 1934 which prohibits “creating a false or misleading appearance of active trading in any security other than a government security.”[ix]An SEC press release on September 27, 2018, stated that “… Musk had not discussed specific deal terms with any potential financing partners, and he allegedly knew that the potential transaction was uncertain and subject to numerous contingencies.” The release went on to state that the SEC was seeking “a permanent injunction, disgorgement, civil penalties, and a bar prohibiting Musk from serving as an officer or director of a public company.”[x]
In response to the SEC’s complaint, Musk quickly settled the case two days later. Musk’s settlement deal with the SEC required that he step down as Tesla’s Chairman for at least three years, that Tesla appoint two independent directors to its board, that the company establish a new committee to oversee Musk’s communications, and that Musk personally pay a twenty million dollar penalty in conjunction with a twenty million dollar fine assessed to Tesla.[xi]The SEC insisted on the procedural safeguards included in the settlement agreement in order to ensure compliant communication from Musk in the future. In particular, SEC Chairman Jay Clayton stated that the settlement reaffirms a fundamental aspect of securities law that “… when companies and corporate insiders make statements they must act responsibly, including endeavoring to ensure the statements are not false or misleading and do not omit information a reasonable investor would consider important in making an investment decision.”[xii]
This case could have widespread implications throughout the corporate community. The SEC has made clear that it takes potentially misleading statements seriously – no matter the forum in which they are issued. Whereas traditional financial updates such as the 8-K are filed exclusively with the SEC, modern technology has enabled executives to directly connect with investors without the regulatory hassles of a government agency.
However, with this opportunity comes responsibility. Given the colloquial nature of communication on social media sites such as Twitter, it is easy for executives to forget the important context that surrounds financial statements. Executives must realize that the fiduciary duty that applied to statements issued through official government agencies such as the SEC apply with equal force to statements on platforms like Twitter. Even executives like Musk who embrace an inflammatory persona must adhere to the more formal requirements of financial disclosures on inherently informal sites such as Twitter.[xiii]Executives of public companies “need to have policies and procedures with respect to public statements, regardless of where” the statements are made.[xiv]
As firms realize the serious implications of having an online presence that disseminates financial information, they will have to enact policies that protect them from securities law violations. One effective way to ensure compliance would be to require that executives refrain from commenting on financial information until it has been filed with the SEC. At that point, the executive could simply link to that information via his or her social media, thereby engaging directly with the investors. This approach would ensure compliance with federal securities law while still taking advantage of the increased accessibility that social media offers. While this approach would ensure compliance, it does undermine the personal touch that executives seek to express on social media platforms.
Firms could also devise some type of approval system before social media messages from a company representative are issued. A specifically tasked commission within firms could have oversight authority over messages containing financial information. A variation of this formula was required in the SEC’s settlement deal with Musk.[xv]While the establishment of Tesla’s committee was compulsory, it serves as a telling sign that the SEC believes that this procedure could effectuate compliance with federal securities law in informal settings like Twitter. In theory, this would also allow executives to retain the personal touch that they seek through social media while still complying with the law.
In addition to general social media oversight, the committee could offer general guidance as to how best comply with SEC regulations. For example, it may be beneficial to refrain from anycommunication on social media for a specified time around when financial disclosures are due to the SEC. This “blackout period” could also be used during particularly volatile market environments in order to prevent any appearance of impropriety.
While Tesla provides a timely example, not all executives are as interactive with their investors on social media. However, even more reserved executives should be wary of their presence on informal sites such as Twitter. Even though Musk’s tweets are often inflammatory and garner heightened scrutiny, executives everywhere should take note of the seriousness of their disclosures, regardless of their following.
The importance of social media in investor relations will only increase in the coming years. As social media platforms continue to grow, executives may find it more efficient and personal to communicate financial information via sites like Twitter.[xvi]This will present many new challenges as the SEC attempts to regulate a traditional crime on an innovative new platform. For example, the SEC may have to further clarify their Regulation FD guidance to account for social media.[xvii]However, the SEC may be reluctant to make these changes due to potential political blowback. As a result, the SEC must find a way to incentivize firms to comply with disclosure regulations without unduly infringing upon executives’ ability to communicate with their consumers and investors.
Firms will need to respond to the SEC’s new guidance as it is developed. Whether this is through in-house mechanisms or by filing an 8-K in lieu of a social media disclosure, firms must exercise great care to reign in their enhanced access to investors.
*Jack Igoe is a Junior Editor with MJEAL. He can be reached at firstname.lastname@example.org.
The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.
[i]Complaint, U.S. Sec. & Exch. Comm’n v. Musk, Case No. 1:18-cv-8865 (2018).
[ii]Elon Musk (@elonmusk), Twitter, https://twitter.com/elonmusk.
[iii]Twitter Inc., Selected Company Metrics & Financials(Oct. 2018), https://s22.q4cdn.com/826641620/files/doc_financials/2018/q3/Q3-2018-Selected-Company-Metrics-and-Financials.pdf.
[iv]Tim Cook (@tim_cook), Twitter, https://twitter.com/tim_cook; Bill Gates (@BillGates), Twitter,https://twitter.com/BillGates.
[v]Elon Musk (@elonmusk), Twitter(Aug. 7, 2018, 9:48 AM), https://twitter.com/elonmusk/status/1026872652290379776?lang=en.
[vii]Tesla Common Stock Historical Prices,Nasdaq, https://www.nasdaq.com/symbol/tsla/historical (last visited Dec. 28, 2018).
[viii]Elon Musk (@elonmusk), Twitter(Aug. 7, 2018, 11:13 AM), https://twitter.com/elonmusk/status/1026894228541071360.
[ix]Securities Exchange Act of 1934, 15 U.S.C. §78i(a) (2012).
[x]Misleading Tweets,supranote 6.
[xi]Musk Settles SEC Fraud Charges: Tesla Charged with and Resolves Securities Law Charge,U.S. Sec. and Exchange Commission(Sept. 29, 2018), https://www.sec.gov/news/press-release/2018-226.
[xii]Statement Regarding Agreed Settlements with Elon Musk and Tesla, U.S. Sec. and Exchange Commission(Sept. 29, 2018), https://www.sec.gov/news/public-statement/clayton-settlements-elon-musk-and-tesla.
[xiii]See,e.g., Matt Phillips, Elon Musk Rejects ‘Boring, Bonehead Questions,’ and Tesla Stock Slides, N.Y. Times(May 3, 2018), https://www.nytimes.com/2018/05/03/business/tesla-elon-musk.html (detailing Musk’s inflammatory comments towards short sellers on an investor conference call); Mihir Zaveri, Elon Musk Walks Balk ‘Pedo Guy’ Attack on Thai Cave Diver, N.Y. Times(July 18, 2018), https://www.nytimes.com/2018/07/18/business/elon-musk-vern-unsworth-pedo-guy.html (detailing Musk’s derogatory Twitter comments directed towards a critic).
[xiv]Tom Zanki, Musk Twitter Gaffe Shows Need For Stronger Board Oversight, LAW360 (Oct. 1, 2018, 8:20 PM), https://www.law360.com/securities/articles/1087397/musk-twitter-gaffe-shows-need-for-stronger-board-oversight (quoting Mary Hansen).
[xv]See supra note 12.
[xvi]Number of Social Network Users in the United States from 2015-2022, Statista(July, 2017), https://www.statista.com/statistics/278409/number-of-social-network-users-in-the-united-states.
[xvii]Regulation FD, 17 C.F.R. §243 (2004).