When Does a Tweet Fall Afoul of Regulation FD

On August 7, 2018, Tesla CEO Elon Musk used his personal Twitter account (@elonmusk) to propose a buyout of the company for $420 a share, stating that funding was secured. The price was perceived by most to be a marijuana reference. Nonetheless, Tesla shares ended the day with an 11% gain.

Winter 2019

On August 7, 2018, Tesla CEO Elon Musk used his personal Twitter account (@elonmusk) to propose a buyout of the company for $420 a share, stating that funding was secured.1 The price was perceived by most to be a marijuana reference.2 Nonetheless, Tesla shares ended the day with an 11% gain.3 With one tweet, Musk caused share prices to jump (and subsequently plummet once he called off his plan), created unrest among his investors, and, perhaps more significantly, drew the attention of the Securities & Exchange Commission (SEC).

The potential effect of social media on financial markets is undeniable. As social media has become more mainstream, the SEC’s position on the use of such technologies to make corporate disclosures has evolved. Given this changing environment, how can corporate officers using social media avoid violating securities regulations, particularly Regulation Fair Disclosure (Regulation FD)?

The Reed Hastings Rule

Regulation FD, codified as 17 CFR Parts 240, 243, and 249, was adopted by the SEC on August 15, 2000, to address the problem of selective disclosure where “a privileged few gain an informational edge – and the ability to use that edge to profit – from their superior access to corporate insiders, rather than from their skill, acumen, or diligence.”4 The rule makes clear that public disclosure of material, nonpublic information must be made whenever such information is disclosed to any group that includes one or more enumerated persons, including shareholders and securities professionals. More than a decade later, in an April 2, 2013, report, the SEC confirmed social media as a proper means to announce such information so long as investors have been alerted, explaining that “issuer communications through social media channels require careful Regulation FD analysis comparable to communications through more traditional channels.”5

The 2013 SEC Report was the result of an investigation into a post by Netflix CEO Reed Hastings on his personal Facebook account, boasting that for the first time subscribers had exceeded 1 billion hours of watching per month, which caused the company’s share price to rise.6 Neither Hastings nor Netflix had previously used Hastings’ Facebook page to announce company metrics, Netflix had not previously informed investors that Hastings’ Facebook page would be used to disclose information, and the post was not accompanied by a post on Netflix’s website or social media accounts, a press release, or a Form 8-K.7 The SEC opened an investigation, but, perhaps recognizing the uncertainty as to how Regulation FD applied to social media disclosures, ultimately did not take enforcement action against Hastings.8

Elon Musk’s $40 Million Tweet

The previously little-known 2013 SEC report received significant attention with Musk’s August 7, 2018, tweets. In accordance with the report, Tesla had actually filed a Form 8-K with the Commission, stating that it intended to use Musk’s personal Twitter account as a means of announcing material information to the public.9 The SEC, however, took issue with Musk’s representation that he had funding in hand when making the disclosure on social media. The SEC believed Musk’s statement to be false. And, at the end of September 2018, the Commission filed separate suits against Musk and Tesla in the Southern District of New York, asserting that Musk’s tweets contained false and misleading statements, that Musk knew or was reckless in not knowing that each of the statements were false and/or misleading, and that Tesla did not have procedures in place to assess the accuracy of Musk’s tweets or whether his tweets were required to be disclosed in SEC filings.10

Within days, Musk and Tesla settled with the Commission.11 In an unprecedented settlement, Musk and Tesla agreed that each would pay a $20 million fine; Musk would step aside as chairman for three years; Tesla would add two independent directors and take steps to monitor Musk’s communications with investors; and Tesla would create a committee of independent directors to monitor Musk’s communications.12 Musk, however, will remain the company’s largest shareholder, a member of the board of directors, and CEO of Tesla.13 Private actions remain pending.14

What Must Companies Do To Ensure Compliance?

As the SEC has cautioned, material, nonpublic information disclosed on social media can be deemed selective disclosure and each case requires a rigorous Regulation FD analysis. Per SEC guidelines, the following is a non-exhaustive list of factors that companies and corporate executives must take into consideration in order to ensure compliance with Regulation FD. First, before using social media to disclose material, nonpublic information, companies must make investors aware of which social media account(s) they plan to use. The SEC recommends that companies alert investors in advance through their websites, in press releases, or, like Tesla, in a Form 8-K.15 Second, access to the particular social media account must not be restricted; the general public must have access to it.16 While the SEC has not opined on “blocking,” it stands to reason that specific individuals cannot be blocked from viewing the account. Third, investors must be able to efficiently find information about the company. Material, nonpublic information should be prominently disclosed and presented in a format readily accessible to the general public.17 Fourth, investors must be afforded a reasonable waiting period to react to such information. That is, companies need to wait a reasonable period of time for the information to disseminate before considering it publicly disclosed. Companies should look at the particular facts and circumstances in determining what may be a reasonable waiting period (e.g., the size and market following of the company, the nature and complexity of the information, and the extent to which the account is regularly accessed).18 And fifth, companies and their corporate executives must endeavor to ensure that statements on social media are not false or misleading.  As seen with Musk, one tweet, whether or not a joke, can result in significant market disruption, litigation, investigations, substantial fines, and termination.     

Beyond Musk, the SEC will undoubtedly continue to focus on the use of social media by corporate officers. Three weeks after Musk’s tweet, the Commission issued a solicitation for a commercial off-the-shelf social media monitoring tool in order to flag certain statements on social media sites.19 The Commission’s position on social media disclosures will certainly continue to evolve. As the legal landscape takes shape, corporate officers should keep abreast of the SEC’s position and judicial decisions that could impact their use of social media. Whether or not Musk’s tweets violated Regulation FD, one thing is certain: He should think before he tweets.

[1] https://twitter.com/elonmusk/status/1026872652290379776. The same day, Musk posted a series of additional statements in support of his original tweet. See https://twitter.com/elonmusk.
[2] 420 is well understood to be slang for the use and enjoyment of marijuana. But, in an interview with The New York Times, Musk denied the drug reference and claimed he got the figure by adding a 20% premium on Tesla’s trading price and rounding up by $1. https://www.nytimes.com/2018/08/16/business/elon-musk-interview-tesla.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=first-column-region&region=top-news&WT.nav=top-news.
[3] https://www.nytimes.com/2018/08/07/business/tesla-stock-elon-musk-private.html.
[4] https://www.sec.gov/rules/final/33-7881.htm.
[5] https://www.sec.gov/litigation/investreport/34-69279.pdf.
[6] Id.
[7] Id.
[8] Id.
[9] https://www.sec.gov/Archives/edgar/data/1318605/000119312513427630/d622890d8k.htm.
[10] United States SEC v. Musk, Case No. 1:18-cv-08865-AJN (S.D.N.Y.); United States SEC v. Tesla, Inc., Case No. 1:18-cv-08947-AJN (S.D.N.Y.).
[11] https://www.sec.gov/news/press-release/2018-226. Judge Nathan approved the settlement on October 16, 2018.  United States SEC v. Musk, Case No. 1:18-cv-08865-AJN at Dkt. No. 14; United States SEC v. Tesla, Inc., Case No. 1:18-cv-08947-AJN at Dkt. No. 14.
[12] https://www.sec.gov/news/press-release/2018-226.
[13] See id.; https://www.businessinsider.com/elon-musk-tesla-chairman-replacement-2018-10.
[14] https://www.cnbc.com/2018/09/28/sec-fraud-charges-arent-the-only-legal-woes-tesla-ceo-elon-musk-faces.html; see Case No. 3:2018-cv-04865 (S.D.N.Y.).
[15] https://www.sec.gov/litigation/investreport/34-69279.pdf.
[16] Id.; https://www.sec.gov/news/press-release/2013-2013-51htm.
[17] https://www.sec.gov/rules/interp/2007/34-58288fr.pdf
[18] Id. The SEC guidelines do not state how much time constitutes a reasonable waiting period. See id.
[19] https://www.fbo.gov/index.php?s=opportunity&mode=form&id=cb35eb83b39b56d47aa531bd800dfcac&tab=
core&_cview=0. A contract was subsequently awarded to Talkwalker Inc. See id.

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Reena Jain

Associate

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