Elon Musk Is on a Tight Leash With the SEC — Here’s Why Investors Should Be Grateful

Elon Musk and Twitter prove to be a bad mix. Again.
  • The SEC asked a federal court to hold Elon Musk in contempt because of a tweet in which he commented inaccurately on the company’s projected 2019 production.
  • Musk corrected that tweet, but his settlement with the SEC over his previous missteps on Twitter required him to clear his tweets with company lawyers.
  • Tesla’s stock opened with a 2.2 percent drop on the morning of Feb. 26.

Elon Musk’s Twitter account has landed him in hot water with the Securities and Exchange Commission again, sending Tesla stock plunging in after-hours trading on Feb. 25. News broke after market close that the SEC was asking a federal court to hold Musk in contempt over tweets about Tesla’s projections for production this year.

The SEC filing stated that Musk — who already had to give up his role as chairman of Tesla as part of a settlement over past improper tweets — failed to clear the tweet with the company’s lawyers, as was outlined in their past agreement.

That sent Tesla stock plunging after hours, ultimately opening at $292.22 on the morning of Feb. 26, off 2.2 percent from the previous day’s close at $298.77. The story has raised some interesting questions about the role of executives and the nature of public and non-public information in the era of social media.

See: Tesla Stocks Drop as SEC Files Fraud Charges Against Elon Musk

Elon Musk’s Twitter Account Keeps Getting Him in Trouble

The most recent tweet that landed Musk in hot water came on Feb. 19, when he tweeted that Tesla would produce 500,000 cars in 2019, only to tweet out a correction about three and a half hours later that he meant to say Tesla would reach an annualized rate of production of 500,000 cars by the end of the year. That was already public information — it was contained in the Q4 report released on January 30th — but Musk’s mistake in his earlier tweet raised red flags.

It’s arguable how innocuous a mistake that might be, but Musk is already on a tight leash. He tweeted last year that he was taking the company private at $420 a share and that he had already secured funding. This proved untrue. Musk’s brag ultimately resulted in a settlement with the SEC in which Musk stepped down from his role as chairman, he and the company each paid fines of $20 million and Musk agreed not to return to the chairman position for three years.

Related: Elon Musk Donates $480K to Flint Schools, Continues SEC Damage Control

SEC Rules Exist to Protect Investors

Some people might look at the current flap and scratch their heads about why a few tweets are worth so much acrimony. But it’s important to remember that the flow of information from publicly traded companies and their executives and officers is regulated for a reason.

Ultimately, it’s about protecting the average investor. The current environment requires companies that trade on public markets to release information in a structured way that gives every investor equal access to that information. Quarterly earnings reports, for example, are filed with the SEC and then released to everyone at the same time so that no investor can trade on that information prior to the general public knowing it — or, as Martha Stewart can attest, not legally.

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That’s part of making markets a relatively safe place for the average investor. When there’s equal access to information about these companies, it means even 401(k) investors who aren’t actively following markets on a daily basis can still be reasonably assured that they’re getting a fair shake when they invest. However, if executives and officers from these companies had free reign to strategically release information to manipulate markets — or even spread misinformation without serious consequences — it would ultimately tip that balance away from the average investor in a patently unfair way.

Decide for Yourself: Despite Controversial Tweetstorm, 5 Reasons You Should Still Invest in Elon Musk

Why Elon Musk’s Tweets Matter

While Musk’s tweet might seem like a relatively innocuous slip, it’s also the sort of slip that can have much larger ramifications. That’s especially important in the context of his past transgressions and his settlement with the SEC.

See: Is Elon Musk the Disruptor the Car Industry Needs?

And though you might feel like the SEC is overreacting in this situation — and you would not be alone — it is important to remember that controlling the flow of public information is a crucial part of their mission and plays an important role in making public markets, well, public. Keeping stock markets the sort of ecosystem that — while chaotic and risky — still allow individual investors to feel as though they’re getting a fair shake when they contribute to their 401(k) is important.

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