Can Elon Musk Tweet That? The SEC May Have an Opinion

Tesla Inc. founder and Chief Executive Officer Elon Musk roiled trading and sowed confusion about his future plans after tweeting that he’s considering taking the company private at $420 a share. The electric carmaker’s stock soared as much as 8.5 percent after the tweet before trading was halted. Musk’s tweet also sowed confusion over whether he meant it as a joke or whether he violated the U.S. Securities and Exchange Commission’s fair-disclosure rules. But investors and securities lawyers are still scurrying to learn about an obscure SEC decision known as the Reed Hastings Rule.

1. What is the Reed Hastings Rule?

The SEC first ruled on the use of social media for disclosing material information after Netflix Inc. CEO Reed Hastings wrote in a July 2012 Facebook post that viewing on his company’s video-streaming service had “exceeded 1 billion hours for the first time.” The regulator later determined that Hastings wouldn’t face enforcement action and declared most social media “perfectly suitable” for communicating company information as long as investors are alerted and access isn’t restricted.

2. What did Elon Musk tweet?

In his initial tweet, Musk wrote: “Am considering taking Tesla private at $420. Funding secured.” It came as shares were already surging on news that Saudi Arabia’s sovereign wealth fund had built a roughly $2 billion stake in the company over the past few months.He followed up the initial foray with additional details in a series of replies to questions and other statements.

3. What’s wrong with that?

Setting aside the question of whether announcing the news via Twitter was proper, regulators might want to examine Musk’s declaration that funding for the move had been secured, an assertion for which he offered no further detail. He doubled down on the assertion a few hours later when he tweeted that “Investor support is confirmed.” Bankers close to Tesla were said to have had no knowledge of plans for taking the company private, Financial Times reporter Arash Massoudi said in a CNBC interview.

4. What is Regulation FD?

The SEC rule aims to promote “full and fair disclosure” of corporate information by requiring a level playing field for announcements of material nonpublic information. The rule was initially adopted in 2000, before the rise of social media. The agency modified its view of permissible venues with its 2013 decision not to act against Netflix’s Hastings.

5. So did Musk violate the rules?

Turns out truth may really be the best defense. As unorthodox as the decision to announce the possible plan by Twitter might have been, Musk’s legal concerns may be largely mitigated by him having been honest about how far along it was. Still, even if the SEC and regulators in Delaware — where the company is registered — remain at bay, Musk could be open to lawsuits from shareholders and other interested parties as he moves along with his bid.

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