Some legal authorities are commenting that Elon Musks public mention of taking Tesla private may have violated Securities and Exchange Commission Rule 14e-8. This prohibits publicly traded companies from announcing plans to buy or sell securities if executives don’t intend to follow through within a reasonable time. The purpose of the rule is to prevent manipulation of the stock price. Musk tweeted “Am considering taking Tesla private at $420. Funding secured.” This tweet resulted in a stock price spike of Tesla to $387.49 closing price. At $420 per share, this would mean Tesla would need to come up with $71 billion to take the company private. I don’t think there is a violation despite the unusual nature of Musks tweet.
Here is the language of the regulation at issue:
Sec 240.14e-8 Prohibited conduct in connection with pre-commencement communications.
It is a fraudulent, deceptive or manipulative act or practice within the meaning of section 14(e) of the Act ( 15 U.S.C. 78n) for any person to publicly announce that the person (or a party on whose behalf the person is acting) plans to make a tender offer that has not yet been commenced, if the person:
(a) Is making the announcement of a potential tender offer without the intention to commence the offer within a reasonable time and complete the offer;
(b) Intends, directly or indirectly, for the announcement to manipulate the market price of the stock of the bidder or subject company; or
(c) Does not have the reasonable belief that the person will have the means to purchase securities to complete the offer.
Whether Musk violated the restrictions on market manipulation may depend on whether he has access to the $71 billion and is getting ready to buy the company private. Some believe that he has plans afoot but no one but Musk really knows. His tweet was an unusual announcement for someone really considering this route but Musk is an unusual and talented man with enormous potential. Other concerns referenced in the press are possible class action suits based on investor losses. However, if the effort to take the company private ensues, there would be little basis for these as the existing stockholders would benefit.