Elon Musk may only face a minor fee if the SEC investigates his tweetstorm about taking Tesla private — here's why

  • Tesla and its CEO, Elon Musk, aren’t likely to face more than a small fine or stern warning if the US Securities and Exchange Commission ends up launching an investigation and bringing an enforcement action against Musk or the company, Nimish Patel, a partner at the law firm Mitchell Silberberg & Knupp who specialises in corporate and securities laws, told Business Insider.
  • By first offering details for a potential go-private deal via Twitter, Musk followed the spirit of the SEC’s rules about disclosing important information, Patel said.
  • And unless the agency finds that Musk purchased Tesla shares before his “funding secured” tweet, it probably won’t resort to anything approaching criminal prosecution, in the event that it does investigate and punish Musk, Patel said.

After a week of speculation, the plans of Tesla and its CEO, Elon Musk, to explore the possibility of taking the company private are coming into focus. But the timing of their announcements has raised questions.

The Wall Street Journal reported last Wednesday that the Securities and Exchange Commission had made an inquiry into Tesla about whether one of Musk’s tweets regarding the possibility of taking the company private was truthful. And on Thursday, Bloomberg reported that the agency was “intensifying” its inquiry.

An inquiry from the SEC does not necessarily mean an investigation will follow.

In an 8-K form filed with the SEC on Tuesday, Tesla said its board of directors had formed a special committee to consider any forthcoming go-private proposals. It was the company’s first regulatory filing since Musk indicated on August 7 via Twitter that he had secured the funding for such a move, were it to pass a shareholder vote.

Within 24 hours of making a disclosure to a select group of people that could affect shareholders, companies must make sure that information is “broadly disseminated,” Nimish Patel, a partner at the law firm Mitchell Silberberg & Knupp who specialises in corporate and securities laws, told Business Insider. He said a company has multiple options to do so, including by filing with the SEC or putting out a press release. The rule is designed to ensure that all investors are aware at the same time of information that could affect the value of their investments, Patel said.

Twitter can be as effective as an SEC filing

Patel added that by first offering details for a potential go-private deal via Twitter, Musk followed the spirit of the SEC’s rules about disclosing important information. Tesla said in a 2013 SEC filing that it might make material disclosures via Twitter, and since Musk’s Twitter account has a large following and is covered widely by the media, he and Tesla are unlikely to be punished for the timing of Tuesday’s 8-K filing, Patel said.

“Can someone really say that they weren’t aware of this information?” he said.

The SEC is more likely to focus on Musk’s use of the phrase “funding secured” in the August 7 tweet. On Monday, Musk said in a statement that he used the phrase because he believed there was “no question” Saudi Arabia’s Public Investment Fund would provide funding for a deal to convert Tesla into a private company.

But Musk didn’t mention any legally binding agreements that were in place at the time he sent the “funding secured” tweet and went on to say he was in discussions with other investors as well, which suggested some sources of funding were not settled before the tweet was sent.

“As a securities lawyer, I would not advise my client to use the word ‘secured’ at the stage where I believe that they might be at in that conversation,” Patel said, adding that Musk should have included more context about potential funding sources in his tweet.

Musk probably won’t face severe punishment

While it’s difficult to tell whether the SEC will launch an investigation and bring an enforcement action against Tesla, Patel said any penalty would most likely be a small fine or a stern warning, as opposed to anything approaching criminal prosecution, unless the agency finds that Musk purchased Tesla shares before his “funding secured” tweet increased the price of the company’s stock.

“I don’t think this is going to be a big issue for the SEC,” he said.

Gene Munster, a managing partner at the venture-capital firm Loup Ventures, echoed that point in an interview with CNBC. He said that while he expected Tesla to receive a small fine from Nasdaq for failing to notify the stock exchange before Musk’s “funding secured” tweet, he did not expect Musk or the company to face more extensive punishment.

“I expect a fine will be levied against Tesla,” he said. “It will be a small fine, my guess is probably below $US50,000.”

Have a Tesla news tip? Contact this reporter at [email protected].

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