The wide world of social media creates the opportunity for businesses to market to a vast crowd. It can be incredibly beneficial when used the right way, but consequences are high when used incorrectly. Rules have been set in place by the Securities and Exchange Commission (SEC) that are meant to hold companies to a certain standard on their social media outlets. Unfortunately, Tesla’s front man, Elon Musk, recently broke some of those requirements with a controversial Tweet and is now dealing with the legal and financial consequences.
In August 2018, Musk drafted a Tweet which led shareholders to believe he planned to take Telsa private at $420 a share (considerably more than the trading price at the time), and stated that he had secured funding. A subsequent Tweet also mentioned that the only thing holding the transaction back was a shareholder vote.
The issue with this Tweet is that it is considered to be fraud by the SEC as it is a “deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of securities laws.” The SEC claims that a significant stock price jump over six-percent and a large market disruption on August 7th was due to Musk’s misleading Tweet.
Musk broke the Regulation Fair Disclosure (FD) rule which states that they require companies to “distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively.” Back in 2013, Tesla announced that they would be using Musk’s Twitter account as a way to distribute material information, and shareholders were encouraged to keep an eye out for announcements. It should be noted that, however, that the SEC has no filings from Tesla about disclosure controls or procedures to determine the accuracy or completeness of Musk’s Tweets.
A settlement has been agreed upon between the SEC, Musk, and Tesla without the company admitting or denying the allegations. (Read the official SEC press release here.) The punishment for Musk’s slip-up will require him to resign as Tesla’s chairman, and he will not be eligible for re-election for three years. Meanwhile, Tesla will be required to appoint two independent chairman and establish a committee to over-see Musk’s communication. Lastly, Musk and Telsa have been ordered to pay a total of $40-million in penalties to any affected investors under a court-approved process.
With great power comes great responsibility. While social media can be a wonderful outlet to promote business, there can be significant consequences for misleading the public. The SEC’s goal is to regulate publicly distributed information and protect investors. The SEC hopes that this legal action will prevent any further issues for Tesla’s shareholders.