Tesla CEO Elon Musk is facing increasing pressure to explain his plan to take the company private — including lawsuits and the threat of an SEC investigation — after tweeting last week that he had "funding secured" for the move. On Monday he hit back with a blog post explaining that the capital would come from Saudi Arabia's sovereign fund.
Following a move by the Saudi fund to purchase 5 percent of the company’s stock, Musk said he had met with representatives again, and “left the July 31 meeting with no question that a deal with the Saudi sovereign fund could be closed."
The Saudis, Musk added, had “approached me multiple times about taking Tesla private.”
But just how serious Saudi Arabia’s Public Investment Fund might be is a matter of debate, and one likely to come under increasing scrutiny in the coming days. Several reports appear to confirm talks are underway, though others question whether there is, in fact, any real interest by the Saudis to move forward.
Whether other sources of funding might be involved remains a question echoing across Wall Street. Even for a country as rich as Saudi Arabia, the cost of privatizing Tesla would be substantial. As of midday Monday, Tesla stock had drifted down more than 1 percent, to around $350 a share. That still translated into a market capitalization of around $60 billion. And at $420 a share, that would climb to around $72 billion.
Musk has indicated, however, that he hopes to retain a roughly 20 percent stake in Tesla were it to go private, and he expressed his hope, in a tweet posted last week, that “all” current investors would remain with the battery-carmaker under the new ownership structure he envisioned. But they would have to accept having far less control of the company and limited opportunities to sell their shares in the future.
For Tesla, the payoff would be potentially significant. It would remove the need for Musk and his management team to constantly be looking over their shoulder, wondering if any moves they made would anger Wall Street and cause shares to tumble in value. It would also take short-sellers, seemingly the bane of Musk’s existence, out of the picture.
After Tuesday's tweet, investors scurried to snap up the company’s stock, driving it up to a near-record high. The NASDAQ exchange came under fire for a delay in suspending trading of Tesla stock, while a lawsuit was quickly filed by short-sellers who saw a scheme to put them in a squeeze.
But the 47-year-old entrepreneur appears to be facing plenty of other problems, especially if he can’t demonstrate that his original tweet about going private was legitimate. That post may have violated SEC rules regarding announcements related to the buying or selling of securities.
The courts have upheld the right of companies to use social media to post news, but they must still follow some basic rules. Tweets, blogs and Facebook posts, for example, can’t be used to manipulate stock prices. Companies and their executives must prove that they have both the intent and means to back up social media posts. If the SEC determines Musk had broken those guidelines, he and Tesla could face some serious problems, including hefty fines.
Even if federal regulators eventually clear Musk, the events of the last week have raised new concerns about the use of social media — especially Twitter, with its limits on the length of posts — to conduct critical business.
“Twitter is not designed to provide full and fair disclosure. That doesn’t mean that you couldn’t, but in a series of 20 to 30 characters I’m not sure you’re getting full disclosure,” Zachary Fallon, a former SEC attorney and principal at law firm Blakemore Fallon, told Reuters.
Meanwhile, Tesla is also facing two new lawsuits filed Friday on behalf of short sellers who claim Musk’s tweets inflated the price all investors had to pay and, in particular, cost “shorts” hundreds of millions of dollars. Musk has repeatedly called out those betting on Tesla’s stock price to tumble and, in its lawsuit, one of the plaintiffs, Kalman Isaacs, described the CEO’s tweets as a “nuclear attack” intended to “completely decimate” short sellers.
Whether or not there’s a clear basis for Musk’s own optimism, his initial tweets appeared to take virtually everyone by surprise, including members of the Tesla board of directors. Late last week, six of them jointly issued a statement expressing their interest in learning more about the plan.
Musk and Tesla aren’t the only ones coming under scrutiny. The Nasdaq exchange has also taken heat for its slow response to the original Musk tweet. It went live at 12:48 p.m. ET last Tuesday and, typically, the exchange would have been expected to halt trading in TSLA shares until key questions were answered and made public. Instead, Nasdaq waited until 2:08 to suspend trading. And it allowed trading to resume at 3:45 p.m. ET.
Harvey Pitt, the former SEC chairman, declared the delay and subsequent restart of trading “unprecedented,” and “highly problematic.”
While Musk has responded to mounting pressure by pointing to the Saudis as his apparent source of funding, there are plenty of new questions being asked. But answers could be slow to follow.
"Before anyone is asked to decide on going private, full details of the plan will be provided, including the proposed nature and source of the funding to be used. However, it would be premature to do so now," Musk said in his Monday morning blog post.