
Elon Musk is known for many things. He propelled Tesla from small startup to one of the six largest companies in the world, with a market capitalization of around a trillion dollars, all within twenty years. He’s also known for his “mad scientist” ideas (like mind-control microchips), frenetic, often comical presentations , string of high-profile relationships, and general internet trollery and tomfoolery.
It’s at this weird intersection of celebrity, finance, and internet meme culture that our saga begins.
On November 6, 2021, Elon tweeted out a poll asking his nearly 64 million followers: “Much is made lately of unrealized gains being a means of tax avoidance, so I propose selling 10% of my Tesla stock. Do you support this?”
The market reaction was swift and dramatic. Tesla stocks immediately slid by over 6% the following Monday the 8th, and dropped further the rest of the week, sliding by over 15% at the closing bell on Friday the 12th.
This isn’t the first market stir that Elon has caused through social media trolling. From propelling the unexpected rise of Dogecoin in 2020 to causing a hundred-fold increase in the stock price of micro-cap stock Signal Advance by tweeting “use Signal” (which, ironically, was not even affiliated with the Signal chat platform), it’s a fair bet that Elon is aware of his social media capital and has no qualms about causing chaos in the market for no discernable benefit.
While much of Elon’s social media use is tolerable from a regulatory perspective, the line becomes quickly blurred when personal profits are at stake. In 2018, Elon was fined $20,000,000 (with Tesla also paying the same penalty as a company) after he tweeted that he would be taking Tesla private at $420 per share (“420” being a common internet meme), causing the company price (which was under $420 per share at the time) to surge.
There are some obvious paradigmatic cases of web-based market manipulation. Deliberately spreading false rumors about companies to manipulate their stock price and profit by buying and selling prior to the news hitting is clearly wrong, and the Securities and Exchange Commission is quick to enforce these types of schemes.
The SEC regulates this type of conduct through two primary enforcement statutes. The first is Section 17(a) of the Securities Act of 1933, which was enacted to promote market transparency and curtail deceit, misrepresentations, and other fraud in the sale of securities. The second is Section 10(b) of the Securities Exchange Age of 1934 (and Rule 10b-5 promulgated by the SEC thereunder), which was enacted to provide broader authority to the SEC to regulate securities exchanges, create registration and disclosure requirements, and prevent insider trading and other fraudulent activities involving securities. The two statues are largely co-extensive, although Section 17(a) technically applies to the “offer or sale of any securities” while Section 10(b) applies to “the purchase or sale of any security” (an issue which has enjoyed some nuance within Federal court decisions, and which will not be the focus of this article).
The SEC often charges violations of both statues when pursuing an enforcement action, but Section 10(b) is the more likely vehicle when the SEC takes action against statements made on social media. Section 10(b) generally makes it unlawful for someone to:
Section 10(b) is much more nuanced in reality, but this simplistic definition will suffice for this article.
So when do memes cross the line from chaotic humor to actionable misconduct? There are two hurdles the SEC would need to clear in order to take action against Elon for his latest tweet. First, the SEC must demonstrate fraudulent or misleading nature of Elon’s statements – perhaps the most complicated of the legal hurdles. Second, the SEC must demonstrate Elon’s intent to deceive or defraud. And third, the SEC must demonstrate what is known as “loss causation,” or that the statements actually had an appreciable impact on the market that caused harm to investors.
First, the SEC would need to demonstrate that Elon made fraudulent or misleading statements. At face value, the tweet did not make any factual assertions that could be misleading. Elon referred to the common political talking point of billionaire tax avoidance, asked his followers how they felt about it, and then, as promised, actually sold 10% of his stock. It’s not clear how, if at all, Elon would have benefitted from this. There are already disclosure requirements for stock sales of this magnitude under Section 16 of the Exchange Act, so it seems like an odd move to preliminarily announce the sale via Twitter (which is certainly not a requirement written into our Federal laws). Recall, however, that Section 10(b) may be enforced against a person who omits material information when making a statement. Posting via Twitter is clearly making a statement and disseminating information to a large crowd of people. Elon’s tweet can be fairly read to connect his “proposal” to sell 10% of his Tesla stock as a way for him to pay taxes on his “unrealized gains.” So, the SEC would need to point to some missing alternative, underlying reason that Elon is actually selling his stock, and explain how failing to disclose that alternative reason made Elon’s November 6 tweet misleading.
As some news outlets noted, Elon was facing a substantial tax bill on his expiring stock options, so the liquidation may have been necessary to cover the IRS bill – although the ultra-wealthy typically utilize personal loans to pay for taxes and expenses without forfeiting any potential control. Elon may have been providing an alternative, more altruistic narrative of standing against tax avoidance in order to save face and provide a more palatable rationale for his sale (which would have been disclosed regardless). And one could argue that providing this alternative narrative in advance may have caused a lesser diminution in Tesla’s value than if Elon had simply disclosed the impending sale pursuant to standard SEC disclosure requirements. Maybe investors would be spooked by the prospect of an otherwise unexplained sale by Elon of 10% of Tesla stock, perhaps signaling a more systemic problem at Tesla. Given Elon’s past actions, it’s just plausible enough to suspect that he would sell stock to win some Economics 101 argument about realized and unrealized gains, which may have kept Tesla bears at bay enough for Elon to avoid a larger loss.
Assuming this underlying narrative is true, how would the SEC show the second factor – that Elon intended to deceive investors here? For Twitter, especially, intent can be difficult to discern – there’s plausible deniability built in when most of the tweet’s content is sourced from the wide array of culturally-relevant (albeit bizarre) comedic tropes available in the dark corners of the internet (again, looking at you, r/… pretty much everything). Facetious humor has long been the first line of defense against otherwise problematic conduct – think of the schoolyard bully (or talk-show-host-in-hot-water de jour) yelling “it’s just a joke” to cover up whatever antisocial behavior they just engaged in. It’s this murky middle ground where Musk so boldly (and some would say recklessly) treads. However, Elon’s priors may come back to haunt him here. If the “protect Tesla value while I sell stock” narrative is accurate, and the statements did, in fact, contain misleading omissions, it’s not hard to imagine a jury being skeptical of the “it was just a meme” defense.
Finally, the SEC would need to demonstrate that the tweet caused some investors to actually lose money (and, perhaps, more money than they would have lost had Elon simply disclosed the 10% sale through typical SEC disclosure filings). Focusing on market impact alone may not be sufficient to show loss causation here. The “invisible hand” of the market is famous for drawing arbitrary lines in the sand, sending market prices up and down for reasons entirely unconnected to company performance (I’m looking at you r/wallstreetbets), and, indeed, at times seemingly unconnected to… anything. However, given the precipitous fall and timing thereof, it may not be overly difficult to find at least a few investors who would testify that they bought or sold Tesla stocks on the assumption that Elon Musk was simply acting out of altruism, and perhaps saw an opportunity to buy in at a discount.
Maybe the SEC will try to pursue a case. Or maybe they’ll give Elon the benefit of the doubt here. Either way, most company executives should already know not to emulate Elon’s social media behavior. However, with the proliferation of humorous social media becoming a standard tool in corporate advertising, and the increase in social media use in a post-pandemic era, there’s a lot of pressure on brands to push the envelope in order to connect with younger audiences. Much of today’s cultural humor relies on multiple layers of irony and absurdism – often including statements that, taken literally, are downright false. As such, there are substantial risks to co-opting this style of humor for company branding. These social media posts are forward-facing statements, and companies should take care not to make potentially market-influencing statements that could be misinterpreted. Or, like Elon, they should be prepared to eat a huge fine and say it was all “worth it” in the end.
If you have any questions about this article, please contact Matthias Kaseorg (mkaseorg@setlifflaw.com) at (804) 377-1273 or Steve Setliff (ssetliff@setlifflaw.com) at (804) 377-1261.
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