How Elon Musk Could Get Away With It

Amid reports that pressure is mounting on the Securities and Exchange Commission to act on Elon Musk's "funding secured" Tweet, there is also another camp making the argument that Musk "might not have to worry" at all about the SEC.

One of the main reasons offered in a recent Bloomberg article is the fact that the Securities and Exchange Commission's San Francisco office is reportedly understaffed and "often outgunned". That is, they often pursue companies that have more talent, more capital and more resources.

The San Francisco office of the SEC is also tasked with competing for employment with the same "disruptive" technology companies that they are supposed to supervise. The article suggests that the best and the brightest in Silicon Valley don’t aspire to work for the SEC - many would rather work at tech companies and start ups offering the allure of getting in on something big.

“There’s not quite as much trepidation about the SEC” in Silicon Valley, Yale Law Professor Jonathan Macey told Bloomberg. 

There also have been examples in the past of the SEC failing to make any type of meaningful difference when going after technology companies. For instance, the company went after two Apple executives in 2007 for backdating stock options and for Steve Jobs not fully disclosing the extent of his medical leave, when he stated he was getting a "relatively simple" treatment, but was really undergoing a liver transplant. The SEC did nothing.

Or how about the massive data breach at Yahoo while the company was in the midst of its excruciatingly long process of selling itself to Verizon? Back then, the data breach was a major headline that some people thought could jeopardize the deal. The resolution, years later, was likely only reported in a small print headline somewhere on the back pages of the financial news. The SEC settled with Yahoo/Altaba this year for just a $35 million fine.

Everybody also famously remembers when, back in 2013, the SEC went after Mark Cuban for alleged insider trading. Cuban, with exponentially more capital and resources went out, hired a top-notch legal team, and beat the SEC in court at trial.

The SEC’s response to some of the bigger frauds in history – names like Theranos, Enron and Madoff - all generally came after the fraud had already been exposed to the mainstream. The SEC was not the first to act, and some would argue didn’t act preemptively at all, in all three of these cases.

While the field of technology has grown and evolved at an exponential rate, companies have pushed boundaries on how they are allowed to report material information. In a couple of well known cases, the SEC appeared to bend the rules in favor of companies, versus taking enforcement action against them.

One such example was when the SEC changed its corporate communication rules in 2005 in response to needing to delay its IPO due to comments its CEO made:

In 2005 the SEC passed rules to ease restrictions on corporate communications during an SEC-imposed “quiet period” before an initial public offering. The changes were put in place after Inc. had to delay its IPO in 2004 because its CEO gave extensive comments to the New York Times. Google also ran into trouble that year for an interview co-founders Sergey Brin and Larry Page gave to Playboy magazine that was published after the company registered to sell shares.

Another is the famous "Reed Hastings" example where, back in 2013, the SEC approved making corporate disclosures through social media, as long as investors were made aware that these avenues would be used for disclosure. The change came after Netflix CEO made a post that the market deemed material on his personal Facebook page. In that case, the SEC did not pursue enforcement against Hastings. 

Instead of trying to pursue enforcement actions against these executives, the SEC revised the rulebook to "normalize" executives' behavior. It isn’t often that securities laws, some initially written in the 1930s, get meaningful updates. The last of these updates relating to technology came after the Reed Hastings incident, which was nearly 10 years ago.

If you're an Elon Musk supporter, you need to hope that the delta between these arcane laws and how technology has evolved could be a middle ground where he finds some leniency. However, as Yale Law Professor Jonathan Macey told Bloomberg, “That doesn’t mean you can just say anything.”