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August 14, 2018

Can Elon Musk Fool The SEC?

Tesla (NSDQ: TSLA) founder Elon Musk is not your typical CEO, to say the least. He is eccentric and flamboyant, with a following more fitting of a celebrity than a corporate head. He maintains a high-profile social media presence and, like our president Donald Trump, has been known to cause a stir on Twitter.  
His latest eyebrow-raising tweet may get him in trouble with the SEC. In two short sentences on August 7, he said that he was considering taking Tesla private at $420 a share and that funding was secured. Not surprisingly, the stock immediately surged, nearly reaching an all-time high. He later expanded on his tweet via a blog post on Tesla’s official site. His online posts caused Nasdaq to halt trading in TSLA for an hour and a half and caused the share price to jump 11% that day.

Looking Under the Hood

Normally, companies that plan to go private would follow a long procedure and would only make an announcement when they have dotted all their i’s and crossed all their t’s.
To reveal something as significant as this, even if Musk were just wondering out loud rather than making a statement of fact, is unprecedented.
Several years ago the SEC approved using social media to disseminate information, provided that investors know where to look for the information. In that sense, posting about going private should not be a violation.
However, Musk claimed that he had secured funding to buy out at $420 a share (implying a total cost of some $70 billion). If he did already obtain funding, the SEC will want to know why he made the disclosure online rather than in a formal SEC filing. If the SEC starts digging, Musk could get into trouble.
If Musk actually doesn’t have the funding he claims, and no deal happens, the SEC could charge him with fraud if it concludes he made the post to manipulate the stock price. It’s illegal for a director of a public company to “knowingly or recklessly” make material misstatements about that company.
Some of the members of Tesla’s board of directors have acknowledged that the board has held discussions about taking the company private in recent days. Thus, there is some substance behind Musk’s tweet. But there’s no word where the funding is coming from.

Bull and Bear Tug of War

Tesla is a polarizing stock. Most investors either hate it or love it. The bulls see an innovative company that they think will dominate the global electric-car market. The bears see a vastly over-valued company that’s bleeding cash, having trouble executing, and has had only two profitable quarters in its history.
Since its last profitable quarter in 2016, Tesla has had seven-consecutive quarters of increasing losses. The company promises that it will become profitable in the second half of this year, which is possible but not guaranteed.
TSLA is heavily shorted for a reason. It’s extremely richly valued and priced for perfection. Musk’s latest stunt attracts not only regulatory attention, but will also likely attract civil lawsuits from investors who incurred losses as a result of his tweet. This makes Tesla even riskier than it already was.

A Murky Road Ahead

If Musk really follows through with his tweet to take Tesla private at $420 a share, investors who buy the shares today will be able to sell it at that price. So far, there’s no word who Musk raised the money from. There aren’t that many organizations capable of coming up with that much money, and foreign entities may face opposition from the government.
Of course, it’s also possible that Musk prematurely made the announcement just to hurt short sellers. He has made no secret of his disdain for skeptics and has publicly clashed with people who bet against TSLA. There’s little doubt he enjoyed watching shorts lose money after his tweet caused the stock to jump. In this case, not only could the stunt result in SEC penalties, but it would also make Tesla and Musk both lose credibility.
A CEO who thinks outside the box can be a great asset to a company—think Steve Jobs and Jeff Bezos—but a CEO who is too much of a maverick can be counterproductive. Many people still believe in the Tesla story, but how long will the faith last if the company, and its founder, continue to disappoint?
The resilient faith of Tesla bulls underscores an investment truism: the biggest investment gains often come from innovative companies that have developed breakthrough technologies. But you must pick the right companies, with solid fundamentals, and obtain shares on the ground floor, before the investment herd catches on.
Courtesy of Scott Chan, Investing Daily (More from Investing Daily Here
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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