Tesla and SpaceX founder Elon Musk does not shy away from publicity. The entrepreneur has been on the cover of magazines and in front of cameras for years, but his recent posts on the social media site Twitter led the U.S. Securities and Exchange Commission (SEC) to take action. While Musk and the SEC have reached a settlement concerning their dispute, the episode provides a valuable lesson for business owners.
In August 2018, Musk tweeted that he had secured funding to take Tesla (TSLA) private at $420 per share. He posted further details to his Twitter account over the next few hours. Tesla’s stock price jumped more than 6% on investors’ desires to get in before the supposed buy out. The next month, the SEC filed a complaint against Musk in the Southern District of New York seeking civil penalties based on its determination that Musk’s statement “lacked an adequate basis in fact.” The since-settled case is United States Securities and Exchange Commission vs. Elon Musk, Case No. 1:18-cv-08865 in the Southern District of New York.
The SEC believed Musk, who has long feuded with short-sellers, intentionally misled the public to drive up Tesla’s stock price. Musk settled the matter in October 2018. The settlement requires that Musk have all social media communications reviewed by the company’s in-house counsel if they contain information that could affect Tesla’s stock price. Musk also agreed to pay a $20 million fine and step down as the company’s chairman.
Musk defied the terms of the settlement when, in February 2019, he tweeted about the company’s commitment to produce 500,000 cars that year. The SEC, in turn, filed a contempt action against Musk for violating the settlement agreement. Musk’s lawyers did not review the tweets before he posted them, but Musk argued he had the right to determine which posts required review. The SEC and Musk just received judicial approval of a new settlement agreement that more specifically outlines what Musk can and cannot share on social media.
Musk’s case should be a warning to business owners and executives to be careful not to expose themselves or their companies to possible litigation when using social media. Social media posts can, for example, amount to securities fraud depending on the information shared. There are no social media-specific securities regulation, meaning what does or does not cross the line is not black and white. Anytime securities violations are alleged, it is important to engage the help of experienced securities attorneys.