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Elon Musk and his legal team have immersed themselves in the recently published biography of the billionaire entrepreneur. Claiming that they have been preoccupied reading Walter Isaacson’s book is one of the reasons used by Team Musk to avoid testifying as demanded by the US Securities and Exchange Commission (SEC).
This should serve as a warning to other ambitious investors. The government agency is tightening its scrutiny of securities disclosure.
Last week, the SEC filed a lawsuit in federal court to compel Musk to testify. The SEC is investigating Musk’s purchase of X shares in 2022 leading up to his eventual full acquisition of the social network for $44 billion.
The SEC imposes strict regulations on reporting purchases and sales of shares. Investors who accumulate more than 5 percent of a company’s stock are required to file an initial public disclosure within 10 days of crossing that threshold.
Musk initially held a passive investment in X. Subsequently, he became more involved with the company, expressing his desire to join their board. Eventually, he made an outright bid. Musk’s 13D filing, which is mandatory once an investor exceeds 5 percent ownership, took place approximately 20 days after crossing that threshold with X shares.
The SEC’s lawsuit comes at an interesting juncture. In late September, the agency announced over 10 separate actions against individuals and companies for violating regulations regarding the disclosure of share activity.
The SEC has also been considering shortening the disclosure window for 13D filings from 10 days to 5 days, a change from regulations implemented decades ago. Despite all the back-and-forth, fines imposed by the SEC for disclosure violations usually amount to only a few hundred thousand dollars.
However, Musk may face a more significant issue. A federal court recently permitted a civil lawsuit filed by individual shareholders to proceed. These shareholders are seeking damages for Musk’s alleged violations of disclosure rules.
The shareholders argue that had they been adequately informed about Musk’s intentions to acquire X, they would not have sold their shares at a low price prior to his eventual 13D filing.
This lawsuit serves as a reminder that these regulations are not mere technicalities. Efficient and fair markets require the timely dissemination of relevant information.
Lex is the FT’s concise daily investment column. Expert writers in four global financial centres provide informed, timely opinions on capital trends and big businesses. Click to explore
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