It’s the weekend of discontent over at Elon Musk’s electric car high-flyer Tesla Motors. As everyone reading this knows, by floating the idea that he might work to take Tesla private earlier this week, founder and CEO Musk brought on serious SEC scrutiny after the stock spiked in the wake of his tweet.
The media, of course, is all over it. And Tesla investors, who know full-well what they’ve signed up for and have made a killing in the last 10 years, are keeping close tabs, too.
But for CEOs and public company directors, Musk’s run in with the SEC is worth watching because it could signal where the agency comes down about the evolution of corporate communication in the age of social media—no small thing nowadays.
The vagaries of Musk’s Twitter usage, are, of course, well known. As my colleague Jeff Sonnenfeld pointed out earlier this week, Musk’s often off-the-cuff tweets have proved to be a useful source of information about his true character. His assaults on anyone who questions him or the veracity of his ideas are a clear window into his ability to handle stress and perform under increasing scrutiny about the performance of his company, which has proved to be far more adept at creating groundbreaking products than mass producing them for a profit.
But with his tweet earlier this week, Musk’s social media strategy—if anyone would call it that—moved into the realm of SEC scrutiny. By floating his “let’s take it private at $420 a share” idea on twitter, Musk circumvented well-established channels—such as filing a form 8K—for disseminating what would seem to be very material information about a public company. Cue the G-Men.
Most of the coverage so far is focused on whether or not Musk was telling the truth. The SEC will try to suss out whether or not he was really looking for a way—against the odds, many on Wall Street say—of financing a vast LBO or some other scheme or his off the cuff remark and the subsequent price spike violated securities laws. He—and presumably his board— will have a couple days to make that case.
For other CEOs and corporate board members, though, there’s another less-discussed issue worth watching here, one that could have an impact on their day-to-day.
Social media has become an increasingly critical piece of the way companies—and CEOs—communicate with the public. From customer service, brand building, advertising to corporate communications, Facebook and Twitter are ever-more important parts of how business does business.
Yet the rules governing its usage by public companies remain hazy. Back in 2013, the SEC took a crack at it, issuing a report that said companies and CEOs could indeed use social media to disclose information that was important for shareholders—but, and this is a big but—it had to be in “compliance with Regulation Fair Disclosure (Regulation FD)” and “investors have been alerted about which social media will be used to disseminate such information.”
The report stemmed from an investigation into a Facebook post by Netflix CEO Reid Hastings where he boasted that the company’s monthly online viewing had surpassed one billion for the first time. The information was clearly material, but company didn’t file an 8K. Still, the SEC decided not to ding Netflix, “recognizing that there has been market uncertainty about the application of Regulation FD to social media.”
The report they issued as a result, however, stressed that “although every case must be evaluated on its own facts, disclosure of material, nonpublic information on the personal social media site of an individual corporate officer — without advance notice to investors that the site may be used for this purpose — is unlikely to qualify as an acceptable method of disclosure under the securities laws. Personal social media sites of individuals employed by a public company would not ordinarily be assumed to be channels through which the company would disclose material corporate information.”
“This Report is not aimed at inhibiting corporate communication through evolving social media channels. To the contrary, we seek to remind issuers that disclosures to persons enumerated in Regulation FD, even if made through evolving social media channels, must still be analyzed for compliance with Regulation FD.”
The question of whether Elon Musk “analyzed” his Tweet “for compliance with Regulation FD” seems to answer itself, but will the SEC go after him for that? We live in an era when the President of the United States routinely conducts foreign policy via Twitter, and no one seems to notice anymore.
It is worth noting that the Musk episode comes at a time when the SEC seems to be increasingly focused on disclosure. Earlier this summer, SEC Commissioner Robert Jackson told the Society for Corporate Governance in Washington that the agency should revisit its rules on timely disclosure related to Cyber security.
His worry? Many states—including New York—require immediate disclosure of any notable cyber breach to authorities, creating an uneven distribution of potentially market-moving information, since companies have four days to issue an 8K after discovering a problem.
He called for a new look at rules created and promulgated fifteen years ago with the passage of Sarbanes Oxley, and said they were simply growing outdated in the current era of cyber attacks that could impact millions of customers—and flatten a company’s stock price within minutes.
“It was a different world,” he said.
It sure was.