Connor J Ritschard
The rise of social media has redefined communication in the modern world. Prominent figures ranging from CEO’s to the President of the United States now have an easy avenue to quickly disseminate their opinions and views to anyone with access to the internet. While access to information is often seen as a universal good, the recent scandals surrounding Elon Musk illustrate the difficulties of regulating disclosure and compliance with the federal security laws for public companies in the modern age. This is particularly true in regards to, as in the case of Tesla, Silicon Valley corporations led by iconic entrepreneurs who enjoy a cult following.
Elon Musk’s Twitter Spree
On August 7th, 2018, Mr. Musk announced on his twitter account he “was considering taking Tesla private at $420”. Further, Mr. Musk tweeted soon after that “investment support [was] confirmed”and shareholders could sell or hold onto their shares. Mr. Musk continued to tweet about the possible buyout throughout the day. In contrast, Tesla’s official social media and public relations accounts were silent and the New York Times reported Mr. Musk’s tweets had taken Tesla’s board of directors by surprise. Tesla did release a memo from Mr. Musk to their employees regarding Mr. Musk’s thinking regarding going private. The market quickly responded to the news and by the end of the day the value of Tesla’s shares had risen eleven percent.
Mr. Musk went further on August 13th when he posted a blog post on Tesla’s website. The post stated he had “no question that a deal with the Saudi sovereign fund could be closed”. On the same day, Mr. Musk named firms that were supposedly serving as financial and legal advisors on his twitter account.
However, questions quickly surfaced regarding the accuracy of Mr. Musk’s claims. News arose that the SEC was “intensifying its scrutiny of Tesla Inc.’s public statement in the wake” of Mr. Musk’s tweets. Further, the New York Times reported the Saudi sovereign fund had taken “none of the steps that such an ambitious transaction would entail”.
Eventually, on August 24th after the market had closed, Mr. Musk announced on Tesla’s websitethat Tesla would be staying public. At the time of the announcement, the value of Tesla’s stock had fallen to $322.82 well below its open price of 343.84 on August 7th before Mr. Musk’s tweeted about taking Tesla private. The share price fell even further after Mr. Musk’s August 24thannouncement and had fallen nearly sixteen percent from the value at the end of trading on August 7th by August 27th, the first trading day after Musk’s announced Tesla would be staying public.
The SEC’s Response
The SEC was quick to respond to Mr. Musk’s unusual activity. Shortly after Mr. Musk’s August 7thtweets, the SEC began a preliminary inquiry into Mr. Musk’s twitter activity. Further, by August 15th, the SEC had initiated a formal investigation of Tesla and issued subpoenas. Eventually, on September 27th, the SEC filed a complaint against Mr. Musk. The SEC complaint identified four false statements including Mr. Musk’s claim funding was secured. Moreover, the SEC alleged Mr. Musk did not follow the proper due diligence procedures required before a major announcement by a public company. In the complaint, the SEC asked the court to bar Mr. Musk from being an officer or director of any public company.
Ultimately, on September 29th, the SEC announced they had reached a settlement with Mr. Musk. The settlement requires Mr. Musk to step down as chairman of Tesla and to be replaced by an independent chairman. Moreover, Tesla is required to appoint additional independent directors and penalties of $20 million each were assessed to both Tesla and Mr. Musk. Finally, the SEC requiredTesla’s board to “oversee Musk’s communication with investors” including his twitter feed.
Effectiveness of Settlement
The SEC’s ultimate settlement with Mr. Musk is clearly aimed at placing independent supervision over Mr. Musk and reigning in his impulsive twitter statements. However, there is already significant reasons to doubt the effectiveness of the controls placed upon Mr. Musk. On October 24th, less than a week after reaching the settlement with the SEC, Mr. Musk attacked the SEC on his twitter account naming them the “Shortseller Enrichment Commission.” The market quickly responded to his tweet and Tesla shares fell by over two percent.
Mr. Musk’s continued provocative use of Twitter strongly indicates the controls placed over his Twitter activity are insufficient to protect investors. Mr. Musk’s prominent profile and large stake of Tesla stock raise serious obstacles to effective control of his behavior by Tesla’s board. It is difficult to imagine Tesla replacing Mr. Musk with a truly independent chairman. Moreover, Mr. Musk recent Twitter activity indicates the board is unable or unwilling to reign in their provocative CEO. However, perhaps this should be expected. Few companies are as connected to the mystique and fame of their CEO as Tesla. Mr. Musk has become a cultural icon and much of the value of Tesla is connected to his reputation and vision. The SEC aims to protect investor’s interests and few, if any, investors of Tesla desire Mr. Musk to be completely removed from the company. Instead, Mr. Musk remains a key contributor to the attractiveness in investing in Tesla. Nonetheless, the SEC and Tesla’s board must find a more effective way to reign in Mr. Musk’s more impulsive actions. Mr. Musk’s actions have already resulted in a significant loss of value in Tesla’s shares and clearly hurt Tesla’s investors. Moreover, in the age of Silicon Valley entrepreneurs, it is doubtful Mr. Musk’s Twitter storm will be an isolated incident. Instead, the combination of outspoken CEO’s with a cult following and unrestrained personal access to investors is a new reality that the SEC must develop effective procedures to control.
Increased investor access to senior executives through social media may help reduce the information asymmetry facing retail investors. Nonetheless, as demonstrated by the recent Tesla incident, the risks of inaccurate or unsubstantiated information outweighs the possible benefits of unfiltered mass communication. Moreover, this risk is especially high for unsophisticated investors who are more likely to rely on this informal and potentially inaccurate information. Accordingly, the SEC must take a more active role in regulating the messages of prominent corporate figures disseminated through social media.