Analysis: Did Elon Musk Violate SEC Rules With His Twitter Algorithm Poll?

Earlier this morning, Elon Musk created another social media sensation when it was revealed he acquired a 9.2% stake in Twitter Inc TWTR, making him the company’s largest individual shareholder. While the news of Musk’s ownership was only announced today, the purchases were made on March 14.

Yet, Musk watchers recalled on March 24 he began to query and poll his 80 million-plus Twitter followers about their opinion of the platform’s algorithms, suggesting they should be open-sourced. Musk did not mention at the time he acquired his stake in the company.

Musk often gives the impression of someone who plays by his own rules, to the occasional chagrin of the U.S. Securities and Exchange Commission (SEC). But was there anything inappropriate — or worse — in the Tesla Inc TSLA chief putting those questions and polls out to his followers?

No Red Flags, Yet: According to Marilyn J. Ford, the Neil H. Cogan Public Service Chair and professor of law at Quinnipiac University School of Law in Hamden, Connecticut, the answer is a shaky no.

Ford pointed out that Section 13D of the Securities Exchange Act of 1934 requires a person who acquires more than 5% of the equity of a publicly held company to file a statement with the SEC within days of the purchase. Although Musk did not mention on Twitter that he made the purchase, Ford said if he “complied with the statute, he made the disclosure and its public information — he made the disclosure that he has to make, as far as I know, as far as I can tell at this particular point in time.”

The SEC filing would require Musk to disclose his identity, background, fundings sources, where the shares were purchased and the purpose of the purchase. The latter issue, Ford cautioned, could be where things get interesting.

“The only other issue that I see is that Musk has this ongoing controversy with the SEC about his First Amendment rights and freedom of speech, which is probably why he's purchasing the shares in the first place,” she said. “So, the question then becomes: What did he put in that statement? Is it why he’s purchasing the shares? Is he looking to be bought out? Is he potentially going to be making a hostile tender offer for the company? Is he trying to manipulate the stock prices? Those would be the things that I think would be of concern.”

See Also: Why Elon Musk Building His Twitter Stake Signals 'More Aggressive' Involvement Is Likely

A Foxy Proxy Move?: Shuba Ghosh, Crandall Melvin Professor of Law at Syracuse University College of Law in Syracuse, New York, stated Musk’s Twitter polling might be viewed by some as a form of proxy solicitation.

“Proxy solicitation is where a shareholder can get other shareholders to participate in a vote so that management of a company can change its policies,” he said. “And there are rules regarding proxy solicitation. It may be a gray area, but it doesn't strike me as a proxy solicitation. I think he's just doing sort of an investigation as to what the policies are and not necessarily trying to get fellow shareholders to vote in a particular way or swayed them in a particular way — these tweets were done to all his followers, some of whom may be Twitter shareholders, some may not be Twitter shareholders.”

The only mystery of Musk’s actions, according to Ford, comes from Twitter's perspective.

“Is he seriously contemplating making an offer to purchase a company or is he looking for greenmail, which I doubt,” she said. “I don't think it's a ploy to manipulate the stock price, although the prices jumped this morning on that kind of a purchase. But that's because of Elon Musk and the nature of the purchase.”

For the time being, Ford did not see any red flags over Musk’s acquisition.

“Other investors may think this is the time to buy the shares,” she said. “But as long as it's compliant with the SEC’s rules and regulations. I don't see that there's a problem with the SEC.”

Photo: Thomas Hawk / Flickr Creative Commons