It’s strange times indeed when SEC disclosure rules and Regulation Fair Disclosure (FD) near the top of the news cycle. It seems the markets, media and regulators are all a-twitter over Tesla’s (NASDAQ: TSLA) CEO Elon Musk’s Twitter:
Musk is known to be something of provocateur and iconoclast in his communications. The world of Twitter – and social media in general – is often chaotic. Messages, regardless of their veracity, get whipsawed around like dust in a tornado. So, what’s the big deal?
Well, Tesla is a public company with publicly traded stock. For the appropriate valuation of companies and fair operation of the capital markets, there needs to be a degree of trust that when companies disclose material information they do so broadly (so interested parties can readily find the information) and such disclosures not be intentionally misleading or omit material facts that make the disclosure misleading. These expectations are so important the SEC codified them in the Acts of 1934 and Reg FD.
When it comes to disclosure, what is considered material? The courts have defined information as being material when:
There is substantial likelihood a reasonable investor would consider the
information important in making an investment decision or view it as
significantly altering the total mix of information available about a company.
Determining materiality is often a judgement call but there are a few bright lines, which include mergers, acquisitions, tender offers and changes in control or management. Musk’s nine-word Twitter message:
- Was about a material transaction – taking a company private entails a tender offer and could, in effect, result in a change in control; and
- Neither contained, nor coincided with the disclosure of, additional information explaining the terms, timing and financing of such a transaction.
The timing of such a disclosure is also a judgement call. Technically, outside of the mandatory 10-Q and 10-K disclosures, there is no duty to disclose so long as the silence is not misleading, does not result in previous disclosures becoming materially false and the company and insiders do not trade on such information. This allows major negotiations, transactions, research and development activities, etc. to proceed in confidence and secrecy until completion when it does need to be disclosed.
There’s also a question of whether Twitter is an appropriate vehicle for disclosing material information. Given that this Tweet caused substantial market disruption – enough that trading in Tesla’s stock was suspended for 92 minutes – it certainly seems that the news was broadly disseminated. However, Twitter is not generally where investors (or reportedly Tesla’s board) are accustomed to source their news.
By its very nature, one Tweet on a material topic like this can rarely, if ever, contain enough information for a reasonable investor to make an informed investment decision. This is a key reason why the Investor Relations world has been slow to adopt social media as a primary means to share news even though the SEC allows for it if a company has previously advised shareholders they may do such (Tesla advised such in 2013). A best practice would be to issue a press release and/or file an 8-K near simultaneous to posting a Tweet and include in that Tweet a link to the more fulsome source.
Because of this Tweet, the SEC has made some calls to Tesla about this disclosure according to news reports and will likely make some more. No doubt the media will hound sources to obtain leaks about the terms and financing of any potential transaction. Speculators who trade on news flow will remain all revved up.
Loose lips – or more precisely, an itchy Twitter finger – may not have sunk this ship, but this is not an ideal scenario if the real goal (as Musk states) was to focus on operations and long-term growth while minimizing short-term volatility and distractions.
Lead-IR Advisors, Inc.