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Friday, June 05, 2020

Explained: Why Elon Musk’s tweet on Tesla stock price is problematic

This is not the first time that Musk has given statements about his company through social media. In 2018, Musk tweeted he was thinking about taking the company private, which cost him his role as chairman.

By: Explained Desk | New Delhi | Updated: May 2, 2020 6:34:47 pm
Tesla CEO Elon Musk. (Reuters Photo: Hannibal Hanschke)

Tesla lost $14 million in valuation hours after co-founder and CEO Elon Musk Friday tweeted, “Tesla stock price is too high imo”. Musk personal stake too went down by about $3 billion following the tweet.

This is not the first time that Musk has given statements about his company through social media. In 2018, Musk tweeted he was thinking about taking the company private, which cost him his role as chairman. “Am considering taking Tesla private at $420. Funding secured,” he tweeted in August 2018. After his tweet, Tesla’s stock price increased by more than 6 per cent and closed up at 10.98 per cent from the previous day. Recently, a federal judge said Musk and Tesla must face a lawsuit filed by the shareholders regarding this tweet.

How significant are such tweets?

While they are just tweets, their consequences raise questions if it is legal for CEOs of companies to share such information through their social media accounts.

In its 2018 complaint against Musk, the US Securities Exchange and Commission (SEC) referred to his comments as “false” and “misleading” and referred to him as “reckless”. As per an agreement between SEC and Musk, his tweets regarding the company’s finances and sales, etc. need to be vetted by a company lawyer.

“Musk’s statements, disseminated via Twitter, falsely indicated that, should he so choose, it was virtually certain that he could take Tesla private at a purchase price that reflected a substantial premium over Tesla stock’s then-current share price, that funding for this multi-billion dollar transaction had been secured, and that the only contingency was a shareholder vote. In truth and in fact, Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source,” SEC noted in its complaint.

In 2012, Netflix CEO Reed Hastings was investigated by the SEC after he announced on social media that Netflix subscribers had surpassed 1 billion hours of viewing time.

“Congrats to Ted Sarandos, and his amazing content licensing team. Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When House of Cards and Arrested Development debut, we’ll blow these records away. Keep going, Ted, we need even more!” Hastings said in July 2012.

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So then, are CEOs allowed to make such announcements through social media?

Following their investigation of Hastings’s comments, the SEC came to the conclusion that companies could use social media outlets such as Facebook and Twitter to announce key information as long as investors have been alerted about where to look for company-related updates and announcements.

In a report prepared by SEC into the investigation, the body noted that prior to Hastings’s comment, he had not received information from the company’s chief financial officer (CFO), the legal department or investor relations department. “Netflix’s stock continued a rise that began when the market opened on July 3, increasing from $70.45 at the time of Hastings’s Facebook post to $81.72 at the close of the following trading day,” the report said.

Essentially, the investigation into his post raised questions regarding the application of Regulation Fair Disclosure (FD) to his post and the applicability of the Commission’s August 2008 Guidance on the Use of Company Web Sites to emerging technologies including social media sites such as Facebook and Twitter. Regulation FD was adopted to check if issuers were selectively disclosing important non-public information to security analysts and selected institutional investors before making full disclosure of the same information.

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Regulation FD and the Exchange Act prohibit public companies or persons acting on their behalf “from selectively disclosing material, nonpublic information to certain securities professionals, or shareholders where it is reasonably foreseeable that they will trade on that information, before it is made available to the general public”.

In conclusion, the SEC does not discourage the use of social media by companies or people who represent them to communicate information as long as investors know about these channels of communication.

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