Tesla CEO Elon Musk recently settled a case with securities regulators relating to tweets about projected sales numbers. Prior to this deal, the Securities and Exchange Commission demanded Musk be held in contempt over these tweets, alleging they violated a previous settlement agreement.
The long-running feud between Musk and the SEC serves as a cautionary tale for executives of publicly traded companies. While social media can provide a platform for companies to reach shareholders, potential investors, and prospective customers, Musk's feud with the SEC shows how it can also impact investment markets.
Why does the SEC care about social media posts?
The SEC alleged that Musk's social media posts violated Section 10(b) of the Securities Exchange Act of 1934, which, among other things, prohibits making false or misleading statements of information material to investors.1 These anti-fraud rules are meant to protect investors and markets from manipulation.2
In its complaint last fall, the SEC alleged that Musk's tweets about taking Tesla private at $420 per share defrauded investors because Musk had not, in fact, obtained the funding to do so. Based on that information, numerous investors began buying up Tesla stock before prices went up.
According to the SEC, social media messages like Musk's have serious potential for defrauding investors. Additionally, social media posts pose a risk of violating Regulation FD,3 which seeks to promote the full and fair disclosure of material, nonpublic information about publicly traded companies.
Regulation FD implications
SEC rules require publicly traded companies to release material information in a way that broadly and non-exclusively reaches the general public.4 Adopted in 2000, Regulation FD was designed to promote full and fair disclosure of information and address concerns of insider trading. Essentially, it aims to ensure one group of shareholders do not have an unfair advantage over other groups when it comes to information access.
The SEC issued guidance in 2013 relating to social media and Regulation FD, stating that companies could use social media to make important announcements so long as investors knew where to look for such information. The report, which focused on disclosures made by Netflix, noted that "the central focus of [the] inquiry is whether the company has made investors, the market, and the media aware of the channels of distribution it expects to use, so these parties know where to look."
Preventing a run-in with the SEC over social media
As the SEC's approach to social media develops, companies using these platforms to communicate with customers will need to carefully examine their procedures for releasing important information. As we saw with Musk, tweets about projected sales numbers or movements in stock prices can land an executive in very hot water.
1 17 C.F.R. § 240.10b-5
2 Under § 10(b) of the Securities and Exchange Act of 1934, "[i]t shall be unlawful for any person, directly or indirectly, ... [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b). SEC Rule 10b-5 implements § 10(b) by forbidding, among other things, the making of any "untrue statement of material fact" or the omission of any material fact "necessary in order to make the statements made ... not misleading." 17 C.F.R. § 240.10b-5. Izadjoo v. Helix Energy Sols. Group, Inc., 237 F. Supp. 3d 492, 506 (S.D. Tex. 2017).
3 17 C.F.R. §243
4 17 C.F.R. §243