Say what you want about Tesla founder and CEO Elon Musk, the man is certainly a master at generating headlines.
From sniping at investors during a tense conference call to his restless promotion of a self-built mini-submarine as a rescue option for cave-trapped children in Thailand, Musk has consistently generated social media controversies that get amplified by the mainstream media.
His latest controversy is of particular interest to this publication and its readers.
On Aug. 7, Musk tweeted: “Am considering taking Tesla private at $420. Funding secured.”
It would be nearly impossible to find a terse statement capable of generating as much notoriety and hand wringing.
Regulation FD
To start with, did Musk violate the Securities and Exchange Commission’s Regulation FD?
Reg FD (the letters stand for “fair disclosure”) is a 2009 rule requiring that all publicly traded companies must disclose material information to all investors at the same time.
By using a personal account on Twitter to announce of his intention to take Tesla private, Musk could have easily run afoul of the rule. He has Netflix (also run by a corporate visionary) to thank for dodging that regulatory threat.
In 2012, Netflix and CEO Reed Hastings received a Wells notice in response to subscriber information Hastings posted on his Facebook status. In that post, he praised the efforts of his content licensing team, adding, “When ‘House of Cards’ and ‘Arrested Development’ debut, we'll blow [subscriber] records away.”
The next trading day, the stock jumped from $72 to more than $81 as traders digested the news.
The incident underscored the challenge for corporate leaders in the age of social media to balance executive chatter with official company communications that must adhere to the Reg FD.
Earlier that same year, Gene Morphis, CFO of the women's retailer Francesca Holdings, was fired after posting in March potentially “non-public” company information on Twitter. He wrote: “Board meeting. Good numbers=Happy Board.”
As harmless as that post may have appeared, the company saw the post as a violation of Reg. FD that was likely attracting unwanted attention from the SEC, especially as it took place in the quiet period prior to earnings.
These incidents, and others, prompted the SEC to reconsider alternative methods for disclosure. Over time, it recognized that a promoted and easily accessible social media site could meet its material information distribution requirements. The key: Telling investors where to go for company information.
Tesla, in a 2013 Form 8-K filing, laid the groundwork for Musk’s tweets as an acceptable outlet.
It said: “Tesla investors and others should note that we announce material information to the public about our company, products, and services and other issues through a variety of means, including Tesla’s Website, press releases, SEC filings, blogs, and social media.”
It added that, along with more traditional sources of company information: “please follow Elon Musk’s and Tesla’s Twitter accounts: twitter.com/elonmusk and twitter.com/TeslaMotors.”
Out of the weeds? Maybe.
Also said to be drawing scrutiny is whether the seemingly material information announced (going private) is truthful and accurate. If it is not, there is a potential securities law violation. Lacking a specific deal in place, regulators could look at Tesla’s resulting jump in stock price as market manipulation.
Nasdaq rules
Other questions arise, regarding the surprising tweet, for both Tesla and Nasdaq, the exchange that lists its shares.
Despite the unconventional announcement of material news, Nasdaq was slow to put a halt on trading in Tesla’s stock.
In its listing rules, Nasdaq writes that, prior to the “disclosure of any material information that would reasonably be expected to affect the value of its securities or influence investors’ decisions,” a company should “provide notice of such disclosure to Nasdaq’s MarketWatch Department at least 10 minutes prior to public announcement.”
That didn’t happen.
Tesla explains
Since the controversial tweet, Musk has written to employees and shareholders to clarify what happened and why. The latest missive went public Monday.
‘I announced last Tuesday, I’m considering taking Tesla private because I believe it could be good for our shareholders, enable Tesla to operate at its best, and advance our mission of accelerating the transition to sustainable energy,” Musk wrote in a shareholder letter posted on the Tesla website.
Musk explained that a discussion of the plan went before a meeting of Tesla’s full board of directors. “I explained why this could be in Tesla’s long-term interest,” he wrote.
Why did he make a public announcement?
“The only way I could have meaningful discussions with our largest shareholders was to be completely forthcoming with them about my desire to take the company private,” Musk wrote. “However, it wouldn’t be right to share information about going private with just our largest investors without sharing the same information with all investors at the same time.”
Why say that the funding was secured?
“Going back almost two years, the Saudi Arabian sovereign wealth fund has approached me multiple times about taking Tesla private,” Musk wrote. “They first met with me at the beginning of 2017 to express this interest because of the important need to diversify away from oil. … Obviously, the Saudi sovereign fund has more than enough capital needed to execute on such a transaction.”
After the Saudi fund bought nearly 5 percent of Tesla stock through the public markets, “they reached out to ask for another meeting on July 31,” the Tesla CEO added. “During the meeting, the managing director of the fund expressed regret that I had not moved forward previously on a going private transaction with them, and he strongly expressed his support for funding a going private transaction for Tesla at this time. … I left the July 31st meeting with no question that a deal with the Saudi sovereign fund could be closed, and that it was just a matter of getting the process moving.”
Such a deal might not be a sure bet. The involvement of a foreign sovereign wealth fund would likely attract scrutiny under government trade rules, especially when it concerns a company developing technological innovations for the important U.S. automotive industry.
The deal would almost inevitably need to pass muster with the Committee on Foreign Investment in the United States. It reviews foreign investments in U.S. companies, including mergers and acquisitions, with a mission to detect and respond to national security risks.
Going public
In the bigger picture, if Tesla does go private, the move would provide a real-life answer to the increasingly popular (and political) question of why so many companies are choosing not to go public.
In the last 15 years, there has been a dramatic reduction in IPO activity. Since 2000, the average annual number of IPOs is 135, less than one-third the average annual number of IPOs (457) in the 1990s. The decline occurred despite no downward trend in the creation of new companies over the same period.
Congress and the SEC alike have been in a tizzy over those statistics, charging ahead with numerous actions intended to push companies, especially emerging growth companies, into IPOs. There are, for example, new reporting exemptions, and the SEC’s Division of Corporation Finance now allows companies to submit draft registration statements relating to initial public offerings for review on a non-public basis.
Musk’s desire to go private, however, underscores why many founders may question the merits of taking their companies public.
Going public means (in their view) forgoing any nimbleness or out-of-the-box thinking (a Musk forte), in lieu of seeking the approval of directors and shareholders. There is a feeling, accurate or not, that the innovation that made a company a market disruptor will suffer.
There are also a slew of disclosure mandates and accounting standards to deal with. The former comes with cost, complexity, and regulatory oversight; the latter brings added cost and complications when dealing with intangible assets, such as intellectual property and brand recognition.
SEC Commissioner Robert Jackson hit upon another reason: the rise of private markets.
“Two decades ago, a small but growing private company looking for significant funding had little choice but to go public. … Significant growth required scale and liquidity that could only be provided by an IPO.”
Today, however, private markets provide a much more competitive alternative,” he said. “Those markets are larger and more robust than ever—and can support a company’s growth well into the later stages of its life.”
Reading between the lines of Musk’s tweet one needs to ask the fundamental question plaguing the corporate, legislative, and regulatory worlds: “Why even bother with going public in the first place if there are other, better means to capital formation?”
That question, and the ensuing debate, will live on far longer than Musk’s curious tweet.
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