Elon Musk may only face a minor fee if the SEC investigates his tweet storm 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 SEC 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 specializes 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 SEC 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.
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 specializes in corporate and securities laws, told Business Insider. He said a company has multiple options to do so, including by filing an 8-K with the Securities and Exchange Commission or putting out a press release. The rule is designed to ensure that all investors are aware of information that could affect the value of their investments at the same time, Patel said.
Twitter can be as effective as an SEC filing
But he 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. In 2013, Tesla said it may make material disclosures via Twitter in an SEC filing, 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 an August 7 tweet. On Monday, Musk said in a statement that he used the phrase "funding secured" 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 after a July 31 meeting with the fund's managing director.
But Musk didn't mention any legally-binding agreements that were in place at the time he sent the "funding secured" tweet ("He has expressed support for proceeding subject to financial and other due diligence and their internal review process for obtaining approvals," Musk said of the Saudi sovereign wealth fund's managing director) and said he was in discussions with the Saudi fund and other investors, which suggested some sources of funding were not be 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 if the SEC will launch an investigation and bring an enforcement action against Tesla, Patel said, if it does, it will more likely be a small fine or a stern warning than 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 expects Tesla to receive a small fine from NASDAQ for failing to notify the stock exchange before Musk's "funding secured" tweet, neither Musk nor the company will 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 $50,000."
Have a Tesla news tip? Contact this reporter at mmatousek@businessinsider.com.
Read more about Tesla possibly going private:
- 'It was, at best, hasty and naive, and, at worst, manipulative': Experts slam Elon Musk's confusing defense of why he tweeted 'funding secured'
- Elon Musk says he is working with Goldman Sachs and Silver Lake to help take Tesla private
- It is now abundantly clear that Elon Musk does not have 'funding secured'
- Some of Tesla's board members were reportedly 'totally blindsided' by Elon Musk's tweet about going private
- People close to Saudi investment fund reportedly cast doubt on Elon Musk's claims about negotiations to take Tesla private
- If the Saudis do help Elon Musk take Tesla private, the company could actually take over the world