On Tuesday, Tesla Inc. (TSLA) CEO Elon Musk made the dramatic announcement that he was considering taking Tesla private for $420 a share on Twitter. He added that he had secured funding, a statement that gained credence thanks to a Financial Times report from earlier that day that said a Saudi investment fund had taken a nearly 5% stake in the electric carmaker.
An email sent to Tesla employees posted on the company’s official blog explained that Musk is mulling taking the firm private to protect it from short sellers and wild swings in stock prices. It didn’t provide any details regarding financing. (See also: What if Tesla Goes Private?)
While the stock gained 11% before markets close, it was over 1% lower on Wednesday morning as the dust began to settle and investors questioned how viable the billionaire’s plans are. There is also the possibility that regulators could find Musk guilty of market manipulation or securities fraud.
“I do see a few things that are problematic,” said former SEC Chairman Harvey Pitt in an interview with CNBC on Tuesday afternoon. (See also: The SEC: A Brief History Of Regulation)
Pitt made it clear that Musk using social media to inform investors about his intent isn’t in violation of SEC rules as long as investors have been told where to look. That may not be a problem here because, as MarketWatch pointed out, in a Nov. 2013 8K filing Tesla had directed investors looking for additional information to follow Musk’s and Tesla’s Twitter accounts. Musk also has 22.3 million followers on Twitter, and his every tweet on the subject received immense media coverage.
However, Pitt added that the SEC rather than focus on the medium, would most likely examine the facts and Musk’s intent behind the tweets closely to determine if he’s guilty of market manipulation or fraud. According to him, the investigation would begin with a look at all the internal communications between Musk and other directors, senior officers, lenders and the source of the funding to verify if his tweets were true.
According to Pitt, proving manipulation requires showing intent, which is difficult, but if any of the facts Musk disclosed about the source of funding and amount were false, it would constitute fraud, especially if there’s an indication that he was “just floating this out to have an influence of the market price.”
“If he doesn’t have financing in place, but the deal happens anyway, then it may be, no harm, no foul,” said Ira Matetsky, a partner at Ganfer Shore Leeds & Zauderer, to MarketWatch. “If this was a pipe dream going nowhere, there will be a case.”
“The use of a specific price for a potential going private transaction is really unprecedented and therefore raises significant questions about what his intent was,” added Pitt.
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