On August 7, 2018, Elon Musk, CEO of Telsa, tweeted “Am considering taking Tesla private at $420 [per share]. Funding Secured.” Business owners and attorneys quickly wondered whether this tweet violates Security and Exchange (“SEC”) rules regarding financial disclosures. The SEC requires that financial disclosures via social media not be misleading and contain sufficient information for investors so that they are not fraudulently drawn into an investment. The SEC rules are in place to ensure that financial information is not seen by only a select few people, such as in a private Facebook message. The reasoning similar to rules against insider trading: if financial information is only provided to a select few investors, those investors can use that information for their benefit- and thus, to the detriment of other shareholders who did not receive that information.
Financial disclosures via social media run into several problems. Specifically, in regard to Twitter, the 240-character limit does not provide enough text to properly provide financial information. For example, the tweet did not disclose the structure of the deal, how much of the deal would use debt, and any tax impacts. Some attorneys have argued that the failure to provide this information falls with “material omissions” and thus break SEC rules. Others have argued that Musk’s tweet was more of a public mulling about Tesla’s future and not a firm commitment. They point to the use of the word “considering” in arguing that this disclosure falls outside the SEC rules.
While the tweet may not technically break the rule, the SEC is investigating Telsa. The main reason is that the tweet affected Tesla’s stock price, causing it to rise as much as 12%. These types of disclosures are likely to increase in frequency, but that does not mean they are a wise idea. As one attorney stated, “[c]learly is was not what any lawyer with any experience in this kind of stuff would advise to put out.”
Thus, until the SEC firms up the rules and regulations regarding social media disclosures, business owners should refrain from financial and other disclosures via social media that impact investors. To discuss proper corporate disclosures, please contact Benjamin Long of Schmidt and Long.