Elon Musk deserves tougher love from the SEC


Image Credits: Joshua Lott / Getty Images

Four Elon Musk tweets. One Securities and Exchange Commission lawsuit. Two settlement offers. Then some more Musk tweets taunting the SEC.

While Tesla continues to prove its doubters wrong as an automotive and energy business, the ongoing social media sideshow hangs over its finances. The stock rose to $310.70 per share on Monday, after Musk agreed to settle with the SEC last weekend. But the company ended this Friday around where it had been a week before, at $261.95 per share, seemingly driven by investor fears over the chief executive’s ongoing Twitter problem.

The SEC needs to help creative but impulsive entrepreneurs like Musk get off of social media and focus on building their companies—by being fair but firm.

So far, it’s been too easy, and that’s setting the wrong precedent. When companies go public, they’re agreeing to put the interests of their shareholders first. Impulsive tweeting breaks that bargain.

Once Musk rejected the first settlement, the SEC could have proceeded with its lawsuit and set an example. Musk’s tweets were just the kind of egregious behavior that would have been an easy win in court. The SEC wouldn’t have needed to prove any intent by Musk to defraud. It would’ve just had to prove that it was more likely than not that Musk had disclosed a materially false fact or a misleading one without context—not a high bar when you consider the very flimsy basis for Musk’s tweets.

How did we end up here?

It all started with a single tweet. On August 7, Elon Musk tweeted to his more than 22 million Twitter followers: “Am considering taking Tesla private at $420. Funding secured.” The frenzy that followed was amplified by three more Musk tweets.

Combined, these four tweets formed the basis of the SEC’s lawsuit against Musk filed in the Southern District of New York on September 27. In its suit, the SEC asked the court to remove Musk as both Chairman and CEO of Tesla, have Musk pay unquantified civil fines, and prohibit Musk from leading any publicly listed company for an unspecified time.

According to the SEC, Musk’s tweets were based on a roughly half hour meeting on July 31 between him and representatives of the Saudi sovereign wealth fund. At this meeting, the fund told Musk it’d bought nearly 5% of Tesla stock on the open market, and expressed interest in taking Tesla private. But Musk didn’t get any formal offer, he didn’t then get full legal advice about what it would take to go private, and he hadn’t even talked to the fund again before his August 7 tweets.  

Oh, and the $420 price? The SEC’s complaint claims Musk added 20% to the price of the stock at closing the day before his tweet, got $419 and rounded up to $420 because he thought his girlfriend would find it funny given 420’s significance.

Right after the SEC’s suit was filed, a reported settlement between Musk and the SEC would have allowed him to pay a $10 million fine, stay on as CEO and force him to step down as chairman for only two years. Considering what the SEC was suing for, those terms can only be described as generous. But Tesla’s board still rejected the settlement, reportedly because Musk threatened to quit if they accepted.  

The day after rejecting the settlement, Tesla lawyers were back at the SEC groveling. Musk had begrudgingly approved of settling as the company’s stock nosedived nearly 14% on the no-settlement news.  

Under the terms of settlement 2.0, the ban on Musk serving as chairman went from two to three years and the fine on Musk doubled to $20 million. Tesla also agreed to pay a fine of $20 million, to add two independent directors to its board and to elect an independent director as chairman to replace Musk. As part of the deal, Tesla is also required to implement procedures and controls to oversee Musk’s communications, including his social media usage.

Just hours after the judge presiding over the case asked Musk and the SEC to show the settlement was in the “public interest,” Musk took to Twitter again to taunt the very counterpart whose help he needs to get the court on board with the settlement: “Just want to [sic] that the Shortseller Enrichment Commission is doing incredible work. And the name change is so on point!” On cue, Tesla’s stock price fell after Musk’s latest tweet. 

The SEC may still pull the plug on the deal altogether, but—if history is prologue—that seems highly unlikely.

What’s wrong with Musk’s tweets?

The main issue is whether Musk’s tweets were false or at least misleading. Under the SEC’s rules, you can’t make a false material statement or not give enough context in making a statement to make sure it’s not misleading. You can easily see how Musk’s tweets can count as either false or—without any caveats about how preliminary the talks were—at least misleading.

Saying “funding secured,” means Tesla actually had the more than $70 billion probably needed to take the company private. No such funding was actually secured. No deal terms were discussed let alone agreed on with the Saudis. Even if Musk did have funding, approval was far from certain. Any going-private transaction would have required board approval. The Saudis had told Musk their investment may be contingent on Tesla building a factory in the Middle East, a condition which at least one Tesla board member described as a “non-starter.”

It’s not hard to imagine what led to Musk’s tweets. He has been outspoken about being hampered by the myriad requirements that come with being publicly listed. He called an analyst’s questions “boneheaded” and “dry” during Tesla’s May earning call. For years, he’s expressed frustration with short sellers. Musk must’ve genuinely been excited about the prospect of the Saudis taking Tesla private so he’d no longer have to deal with any of this.  

It’s true that disclosure requirements are onerous. It takes countless expensive lawyer hours just to make a single filing with the SEC, only to then have to make another filing the next quarter or with the next material development. The SEC itself moves slowly. It took until 2013 to accept tweets as a form of disclosure. It took until 2014 for it to agree that a hyperlink in a tweet is enough for disclaimer language, as opposed to needing the full disclaimer language within the limited characters allowed in a tweet.

But the SEC’s rules exist for a reason. They are intended to level the information differential between companies and their shareholders, and protect the millions of investors in public companies in the process. Musk may have been well intentioned in his tweets, but that doesn’t put him above the law, or make it okay for him to cause Tesla’s stock price to go on a rollercoaster ride. He can complain all he wants about the SEC’s rules, but these rules have been a requirement for public companies long before Tesla went public. By choosing the public route to get liquidity, Musk and Tesla knowingly signed up for these trade-offs.

Missed opportunity to set clear precedent

Ultimately, what matters most with any action that the SEC takes is the precedent it sets.

The SEC had a unique opportunity here to set an example of Musk’s egregious behavior. Instead, SEC Chairman Jay Clayton’s statement about the settlement made it look like the SEC was making an exception for Musk because he is so central to Tesla. Clayton said penalties for violating securities laws should be balanced with “the skills and support of certain individuals” that are important “to the future success of a company.”

In other words, it seems, you can behave more recklessly the more important you are.

Musk is absolutely central to Tesla, but that doesn’t mean he has to be the one to wear every hat at the company. There’s a reason Tesla has legal, policy and comms departments that go through rounds of approval before making corporate disclosures. It is not much to have asked Musk to call a lawyer in these departments before tweeting.

Instead of setting this double standard based on centrality of a director to a company, the SEC could have taken Musk to court and allowed the court to set a standard applicable to all directors equally. By going that route, Musk would have also had his day in court to argue before an impartial arbiter why the SEC’s actions in suing him were “unjustified.”

Even if the SEC did not want this one case to drag on, leaving Tesla investors in limbo in the interim, it could have at least taken more time before agreeing to the second settlement. The specter of a continuing lawsuit would have served as a stronger deterrent than the two days it took from filing suit to coming to a settlement. Based on Musk’s tweets taunting the SEC after the settlement was agreed, it’d be hard to argue that he’s learned his lesson.

Instead Musk’s cult of being the be-all and end-all on all matters big or small at Tesla will continue. This ultimately disempowers others within the company, lulling them into a false sense of security based on the sacrosanct words of one person. According to the SEC, an investment bank analyst emailed Tesla’s Head of Investor Relations, Martin Viecha, on August 7 following Musk’s tweets asking for a clarification about the funding. Viecha responded within ten minutes with, “I can only say that the first Tweet clearly stated that ‘financing is secured’. Yes, there is a firm offer.”  

Viecha couldn’t have actually known that financing was secured any more than Musk did. He did not actually know whether or not there was a firm offer. But Tesla’s corporate culture clearly didn’t allow him to second guess the words of Musk, to the ultimate detriment of the entire company and its investors.

It may be Musk in the headlines these days, but other public-company CEOs have social media accounts too. What they say—or don’t say—can equally hurt investors and their own companies. If Musk can get away relatively unharmed with bending the rules, what will stop others from trying? The SEC’s indirect acknowledgement that the settlement terms with Musk are justified by Musk’s centrality to Tesla is exactly the kind of precedent other Silicon Valley leaders could latch onto to justify inappropriate social media behavior.

As counterintuitive as it may sound in a world where the most powerful seem to tweet with impunity, we should at least be holding directors of public companies fully accountable for tweets that violate securities law. Tweets and social media posts have real world consequences. Tesla shareholders deserve the brilliant technologist they bet their money on, not a social media troll.

The SEC’s handling of Musk’s tweets is so far a missed opportunity to make that point clear.

More TechCrunch

Welcome back to TechCrunch’s Week in Review. This week had two major events from OpenAI and Google. OpenAI’s spring update event saw the reveal of its new model, GPT-4o, which…

OpenAI and Google lay out their competing AI visions

Expedia says Rathi Murthy and Sreenivas Rachamadugu, respectively its CTO and senior vice president of core services product & engineering, are no longer employed at the travel booking company. In…

Expedia says two execs dismissed after ‘violation of company policy’

When Jeffrey Wang posted to X asking if anyone wanted to go in on an order of fancy-but-affordable office nap pods, he didn’t expect the post to go viral.

With AI startups booming, nap pods and Silicon Valley hustle culture are back

OpenAI’s Superalignment team, responsible for developing ways to govern and steer “superintelligent” AI systems, was promised 20% of the company’s compute resources, according to a person from that team. But…

OpenAI created a team to control ‘superintelligent’ AI — then let it wither, source says

A new crop of early-stage startups — along with some recent VC investments — illustrates a niche emerging in the autonomous vehicle technology sector. Unlike the companies bringing robotaxis to…

VCs and the military are fueling self-driving startups that don’t need roads

When the founders of Sagetap, Sahil Khanna and Kevin Hughes, started working at early-stage enterprise software startups, they were surprised to find that the companies they worked at were trying…

Deal Dive: Sagetap looks to bring enterprise software sales into the 21st century

Keeping up with an industry as fast-moving as AI is a tall order. So until an AI can do it for you, here’s a handy roundup of recent stories in the world…

This Week in AI: OpenAI moves away from safety

After Apple loosened its App Store guidelines to permit game emulators, the retro game emulator Delta — an app 10 years in the making — hit the top of the…

Adobe comes after indie game emulator Delta for copying its logo

Meta is once again taking on its competitors by developing a feature that borrows concepts from others — in this case, BeReal and Snapchat. The company is developing a feature…

Meta’s latest experiment borrows from BeReal’s and Snapchat’s core ideas

Welcome to Startups Weekly! We’ve been drowning in AI news this week, with Google’s I/O setting the pace. And Elon Musk rages against the machine.

Startups Weekly: It’s the dawning of the age of AI — plus,  Musk is raging against the machine

IndieBio’s Bay Area incubator is about to debut its 15th cohort of biotech startups. We took special note of a few, which were making some major, bordering on ludicrous, claims…

IndieBio’s SF incubator lineup is making some wild biotech promises

YouTube TV has announced that its multiview feature for watching four streams at once is now available on Android phones and tablets. The Android launch comes two months after YouTube…

YouTube TV’s ‘multiview’ feature is now available on Android phones and tablets

Featured Article

Two Santa Cruz students uncover security bug that could let millions do their laundry for free

CSC ServiceWorks provides laundry machines to thousands of residential homes and universities, but the company ignored requests to fix a security bug.

2 days ago
Two Santa Cruz students uncover security bug that could let millions do their laundry for free

TechCrunch Disrupt 2024 is just around the corner, and the buzz is palpable. But what if we told you there’s a chance for you to not just attend, but also…

Harness the TechCrunch Effect: Host a Side Event at Disrupt 2024

Decks are all about telling a compelling story and Goodcarbon does a good job on that front. But there’s important information missing too.

Pitch Deck Teardown: Goodcarbon’s $5.5M seed deck

Slack is making it difficult for its customers if they want the company to stop using its data for model training.

Slack under attack over sneaky AI training policy

A Texas-based company that provides health insurance and benefit plans disclosed a data breach affecting almost 2.5 million people, some of whom had their Social Security number stolen. WebTPA said…

Healthcare company WebTPA discloses breach affecting 2.5 million people

Featured Article

Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Microsoft won’t be facing antitrust scrutiny in the U.K. over its recent investment into French AI startup Mistral AI.

2 days ago
Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Ember has partnered with HSBC in the U.K. so that the bank’s business customers can access Ember’s services from their online accounts.

Embedded finance is still trendy as accounting automation startup Ember partners with HSBC UK

Kudos uses AI to figure out consumer spending habits so it can then provide more personalized financial advice, like maximizing rewards and utilizing credit effectively.

Kudos lands $10M for an AI smart wallet that picks the best credit card for purchases

The EU’s warning comes after Microsoft failed to respond to a legally binding request for information that focused on its generative AI tools.

EU warns Microsoft it could be fined billions over missing GenAI risk info

The prospects for troubled banking-as-a-service startup Synapse have gone from bad to worse this week after a United States Trustee filed an emergency motion on Wednesday.  The trustee is asking…

A US Trustee wants troubled fintech Synapse to be liquidated via Chapter 7 bankruptcy, cites ‘gross mismanagement’

U.K.-based Seraphim Space is spinning up its 13th accelerator program, with nine participating companies working on a range of tech from propulsion to in-space manufacturing and space situational awareness. The…

Seraphim’s latest space accelerator welcomes nine companies

OpenAI has reached a deal with Reddit to use the social news site’s data for training AI models. In a blog post on OpenAI’s press relations site, the company said…

OpenAI inks deal to train AI on Reddit data

X users will now be able to discover posts from new Communities that are trending directly from an Explore tab within the section.

X pushes more users to Communities

For Mark Zuckerberg’s 40th birthday, his wife got him a photoshoot. Zuckerberg gives the camera a sly smile as he sits amid a carefully crafted re-creation of his childhood bedroom.…

Mark Zuckerberg’s makeover: Midlife crisis or carefully crafted rebrand?

Strava announced a slew of features, including AI to weed out leaderboard cheats, a new ‘family’ subscription plan, dark mode and more.

Strava taps AI to weed out leaderboard cheats, unveils ‘family’ plan, dark mode and more

We all fall down sometimes. Astronauts are no exception. You need to be in peak physical condition for space travel, but bulky space suits and lower gravity levels can be…

Astronauts fall over. Robotic limbs can help them back up.

Microsoft will launch its custom Cobalt 100 chips to customers as a public preview at its Build conference next week, TechCrunch has learned. In an analyst briefing ahead of Build,…

Microsoft’s custom Cobalt chips will come to Azure next week

What a wild week for transportation news! It was a smorgasbord of news that seemed to touch every sector and theme in transportation.

Tesla keeps cutting jobs and the feds probe Waymo