Elon Musk and the US SEC – Shortsellers Enrichment Commission,BigRedCar
October 5th 2018
Big Red Car here, following the unending saga of Elon Musk of Tesla fame and his continuing dialog with the United States Securities and Exchange Commission.
“Just want to [say] that the Shortseller Enrichment Commission is doing incredible work. And the name change is so on point!” Tweeted by Elon Musk.
Is this the smart play?
Elon Musk, bill of particulars
Elon Musk is the genius behind Tesla and a number of other startups. A South African entrepreneur, he is an interesting person. He is also an impulsive person. The Big Red Car is rooting for him because the BRC always champions the entrepreneur.
1. In an impulsive reaction to short sellers (folks who borrow a stock, sell it, and repurchase it at a lower future price, and return the borrowed shares while keeping the profit), Monsieur Musk suggested he was going to take Tesla private at a share price of $420/share.
He unwisely and untruthfully indicated he had already arranged the funding.
2. Upon inquiry, the US Securities and Exchange Commission took issue with a CEO/Chairman of a public company trolling the public markets and, in particular, saying he had arranged financing when, clearly, he had not.
3. The company and Elon Musk entered into a tentative settlement agreement subject to approval by a Federal Judge.
The settlement looks something like this:
1. Permanent restraining order and injunction against violating Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 — translation: no fraud, untrue statements, material omissions, misleading statements, or deception.
Seems a bit obvious, but it is big because a second offense probably gets you banned for life from running a public company.
2. Pay a civil penalty of $20,000,000 by each of Tesla and Musk – chump change.
3. Musk has 45 days in which to resign as Chairman of the Board of Tesla – pretty hard poke at his ego, I am sure.
4. Musk must submit to company oversight of his social media utterances as well as press releases and earnings calls. “Communications timeout.” Ouch! No midnight, stoned tweets?
5. Here are the actual Orders: Elon Musk Consent Motion for Entry of Final Judgment
Note that this is subject to approval by a Federal Judge who must agree that it is fair (the penalties are large enough to alter Musk’s behavior). This has not yet happened.
The Big Enchilada
The big enchilada is that when a SEC reporting company principal enters into such a consent motion, they are no longer able to avail themselves or their company of certain types of non-public financings and must report that they are a “Bad Actor” in public financings.
This is covered under the rules of “Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings.”
The US SEC can, of course, waive this provision, but given how fierce they have been in pursuing Musk, this is unlikely.
Why with this hanging over Elon Musk’s head, why would he tweet what he did:
“Just want to [say] that the Shortseller Enrichment Commission is doing incredible work. And the name change is so on point!”
Seems dopey, or was Elon Musk smoking another joint? You have to wonder.
The Big Red Car offers the following advice, “Elon, put down the joint. Get back to work. Get a good rest every night. Stop tweeting. Go build cars. Take it like a man and get your revenge at the pay window.”