Securities regulators are likely to focus on whether Elon Musk was telling the truth when he said on Twitter that he had secured funding to take electric car maker Tesla private in what could be the biggest buyout in history.
The Securities and Exchange Commission is questioning the company whether the chief executive's tweets were statements of fact and why he chose to make the disclosure using social media instead of through a filing, the Wall Street Journal said on Wednesday, citing unidentified people familiar with the matter.
The SEC has established that companies can use social media to announce material and potentially market-moving information, according to Bloomberg. But securities lawyers warned that Mr Musk could find himself in legal difficulty if the “funding secured” portion of his statement posted on Tuesday was untrue or half-baked.
John Coffee, a Columbia Law School professor and expert on securities law, said it is “very implausible” that funding has been secured “because you’re talking about an offer of maybe $73 billion”, according to Associated Press.
Tesla shares, which surged 11 per cent on Tuesday on Mr Musk’s statements, dropped 2.4 per cent to close at $370.34 on Wednesday.
“To put that [tweet] out unless he absolutely has financing secured and is ready to make the bid that could be market manipulation,” said Keith Higgins, a Ropes & Gray partner who formerly led the SEC’s corporation finance unit. “He could be in big trouble if that turns out not to have been true.”
Judith Burns, an SEC spokeswoman, declined to comment. Tesla also declined to comment.
Tesla has not disclosed any sources of financing for the deal and no one has stepped forward publicly to say they are backing the plan. On Wednesday, less than 24 hours after Mr Musk's initial tweets, company board members said they had been made aware of his plan last week.
A statement from the Tesla board said directors had met “several times” to discuss the idea after Mr Musk raised going private as a better solution for the automaker’s long-term growth, according to Agence France-Presse.
The board “is taking the appropriate next steps to evaluate this,” the statement added.
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That raises a whole different set of questions about whether SEC rules were violated, Bloomberg said.
Companies are required to fill out an SEC form known as an 8-K to tell shareholders about major events. For the most significant matters, corporations get four business days to file. While there are plenty of examples of companies being fined for failing to meet the deadline, it’s unclear that the board learning of Mr Musk’s plan would trigger that requirement.
“Frankly, the bigger issue is going to be whether the information is correct or not,” said Ira Matetsky, a partner at Ganfer & Shore in New York, who outlined questions the SEC might ask. “When Musk tweeted this, was he saying this was something that was definitely going to happen? Something that might happen? How would a reasonable investor interpret that and was it consistent with the facts as they existed at the time?”
Stephen Crimmins, a former SEC enforcement lawyer who’s now a partner at Murphy & McGonigle, said that Mr Musk’s tweets likely didn’t amount to market manipulation.
“He’s a CEO saying positive things about his company and that he has the ability to pursue a takeover,” said Mr Crimmins.
Other corporate executives have used Twitter to make statements that could have a significant impact on their companies' share prices. But securities lawyers say there are no prior examples of a chief executive making a statement like Mr Musk's during trading hours.
“It’s highly unusual,” said Paul Scrivano, global head of the mergers and acquisitions practice at Ropes & Gray. “I’m not aware of any other deal where the founder is going to take the public company private and announced that he was going to do it by Twitter.”
Meanwhile, equity analysts generally reacted sceptically to the idea of taking the car maker private. Cowen Group said the proposal raised many questions, such as how the company will raise needed capital to execute its manufacturing ramp-up, AP reported.
“It is obvious to see how such a transaction would benefit a CEO who has been very distracted by social media and is focused on ‘burning shorts’,” Cowen said.
However, “we question how remaining investors would benefit from a less liquid structure in which management receives far less scrutiny despite its historically poor execution and track record”.
