Updated on August 15, 2018 to reflect Elon Musk's use of a blog page on the Tesla website to publish his explanation for sending out the August 7th tweets regarding his plan to take Tesla private.
Social media managers for corporations and investment organizations just received an important lesson from Elon Musk. On August 7, 2018, Musk sent out the following series of tweets to announce that he was planning to take Tesla private at $420 a share. This was significantly above the $341 a share trading level on the day before the announcement.
The press is focused on debating Musk’s intentions and the truth of his statement at the time of the tweet. Traders who were short Tesla want to know if Musk purposely issued misleading statements to manipulate the markets and punish them. They are now suing Tesla to force the company to prove that it had the financing lined up before the announcement was made.
While Musk may or may not be guilty of the violating the more onerous SEC Rule 14e-8 designed to prevent market manipulation, he almost certainly violated SEC rules for sharing information with investors in a fair and equitable manner. First, the Tweet came from his personal account and second his personal Twitter account does not appear to be the traditional channel of communication for official Tesla news.
The fact that Musk used a blog page on Tesla's website on August 13th to rationalize his Twitter posts on August 7th demonstrates the gravity of Musk's violation SEC rules regarding the use of social media. It is a good bet that Tesla's lawyers went ballistic when they saw the August 7th Tweets.
The SEC has already ruled on this and issued the following guidelines in an Investor Alert and Bulletin on April 2, 2013. The SEC report that makes clear that companies can use social media outlets like Facebook and Twitter to announce key information in compliance with Regulation Fair Disclosure (Regulation FD) so long as investors have been alerted about which social media will be used to disseminate such information.
Violations of SEC social media regulations have become a fairly common problem because Elon, along with many other Millennials, do not understand SEC Rules and Guidelines regarding Fair Disclosure. He assumed that his Twitter account (read social media) was the most equitable, fair, and timely form to distribute information. This is not necessarily the case.
“One set of shareholders should not be able to get a jump on other shareholders just because the company is selectively disclosing important information,” said George Canellos, Acting Director of the SEC’s Division of Enforcement. “Most social media are perfectly suitable methods for communicating with investors, but not if the access is restricted or if investors don’t know that’s where they need to turn to get the latest news.”
The SEC will research company documents and past communications from Musk and Tesla to determine if Elon’s Twitter account is the normal channel Tesla uses for communicating with investors. If Tesla has not clearly specified that Elon’s Twitter account is the preferred method of communicating company news, then Elon is in trouble.
This rule was formed after the Division of Enforcement launched an investigation into a post by Netflix CEO Reed Hasting on his personal Facebook page on July 3rd, 2012. Hastings stated that Netflix’s monthly online viewing had exceeded one billion hours for the first time. This was significant information and Netflix failed to release the information through a press release or a Form 8-K filing. Furthermore, as the SEC writes, “a subsequent Netflix press release later in the day did not report this information and neither Netflix nor Hastings had previously used his Facebook page to announce company metrics.”
The SEC goes on to report that “The SEC did not initiate an enforcement action or allege wrongdoing by Hastings or Netflix. Recognizing that there has been market uncertainty about the application of Regulation FD to social media, the SEC issued the report of investigation pursuant to Section 21(a) of the Securities Exchange Act of 1934.”
However, that was 2013 and since then the SEC has been very clear about the about applying Regulation FD to social media. In the same report, the SEC writes:
“Personal social media sites of individuals employed by a public company would not ordinarily be assumed to be channels through which the company would disclose material corporate information.”
The basic lesson for Social Media Managers: be careful with the information that you are releasing through social media. The same regulations apply to Investment Advisers and Fund Managers for 40 ACT Funds as well as Reg D investment vehicles. First, make sure that your firm has clearly specified the channels that it will use for distributing important information. Next, make sure that your firm follows those rules when releasing important market information. If a social media channel is not your firm’s outlet for distributing information, make sure that the information is released through traditional channels before you post to social media.
Vernon Budinger, CFA and CAIA
Neural Profit Engines