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Elon Musk's Tesla tweet brings the 'Reed Hastings rule' into play

Daniel Roberts

Tesla CEO Elon Musk sent markets into a tizzy on Tuesday when he tweeted these nine words at 12:48 p.m. EST: “Am considering taking Tesla private at $420. Funding secured.” Tesla (TSLA) shares soared, then the Nasdaq temporarily halted trading, and finally Tesla closed the day up 11%.

Many are now wondering whether the tweet opens up Musk to lawsuits from the very short-sellers he has long complained about. If it is true that Musk had already secured funding to take Tesla private, the tweet is acceptable. If the tweet was carelessly tossed out, short-sellers could argue that Musk did it to pump the stock.

And a second question many are asking is: Did Musk violate fair disclosure regulations? Sure enough, the SEC has already made inquires to Tesla about Musk’s tweet.

Tesla and SpaceX CEO Elon Musk at a SpaceX press conference in Cape Canaveral, Fla., on Feb. 6, 2018. (REUTERS/Joe Skipper)
Tesla and SpaceX CEO Elon Musk at a SpaceX press conference in Cape Canaveral, Fla., on Feb. 6, 2018. (REUTERS/Joe Skipper)

The issue brings to mind a little-known 2013 SEC report that determined, in the SEC’s own wording, “Social media OK for company announcements if investors are alerted.”

Many people in finance refer to it as the “Reed Hastings rule” (though it was merely guidance, not a formal rule) because the report stemmed from an inquiry into a Facebook post by Netflix CEO Reed Hastings.

Hastings posted on his personal Facebook page that Netflix subscribers had surpassed 1 billion hours of watching per month. (They now watch 1 billion hours of content per week.) His post sent the stock soaring, and Netflix had not reported the milestone through a traditional press release. The outcry compelled the SEC Division of Enforcement to review the situation and issue guidance.

The SEC ultimately did not take enforcement action against Hastings because it decided that, “companies can use social media outlets like Facebook and Twitter to announce key information in compliance with Regulation Fair Disclosure (Regulation FD) so long as investors have been alerted about which social media will be used to disseminate such information.”

So, what does that mean for Tesla?

For starters, any Tesla shareholder at this point knows to watch Elon Musk’s Twitter account closely. Musk, more than any other CEO, is extremely candid and outspoken (often to his detriment) on his Twitter account, often using it for thinking aloud. (He has also called Twitter a “meme war land.”) On the other hand, common sense awareness that Musk might tweet his thoughts about Tesla is not the same as Tesla noting that Musk might use his Twitter account to announce material news about the company.

Based on the SEC’s thinking about Hastings, all other things being equal, it is unlikely to find wrongdoing with Musk’s tweet. As analyst Gene Munster of Loup Ventures writes, “We do not see any legal risk in disseminating material information on Twitter due to the Reed Hastings Rule.”

As for the separate question of the truth of Musk’s funding claim, six Tesla board members on Wednesday issued a statement saying that the board had met several times recently to discuss the idea. That at least backs up the premise that Musk’s tweet wasn’t careless, but he may still have to prove that he indeed had funding lined up before he sent the tweet.

If Tesla does go private, it is poised to be the biggest buyout in history. Some of the biggest shareholders who would stand to benefit include T. Rowe Price, Tencent, Blackrock, Vanguard and Morgan Stanley.

Daniel Roberts covers sports business, crypto, and big tech at Yahoo Finance. Follow him on Twitter @readDanwrite.

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