Elon Musk has reached a deal with the Securities and Exchange Commission, the two parties said in a legal filing on Friday. The new agreement provides much more detailed guidance about when tweets and other public statements by Musk must be approved by Tesla lawyers.
Musk’s original deal with the SEC was announced last September. It required Musk to obtain pre-approval for tweets that “contain or could contain” information that’s material—legal jargon for information that’s significant to shareholders. While the SEC expected Musk to begin regularly clearing tweets with lawyers, Musk interpreted this language as giving him significant discretion to decide for himself which tweets contained material information. As a result, he didn’t seek legal review for any tweets in the first few months the agreement was in effect.
In February, Musk tweeted that Tesla “will make around 500k in 2019.” Hours later, he followed up with a clarifying tweet, stating that he “meant to say annualized production rate at end of 2019 probably around 500k.” Musk didn’t get this tweet cleared by Tesla lawyers. The SEC viewed that as a violation of the agreement and asked Judge Nathan to hold Musk in contempt.
Another Silicon Valley company is settling with the SEC: the online lending company Prosper, which the SEC had accused of “miscalculating and materially overstating annualized net returns to retail and other investors.” Prosper has agreed to pay $3 million as part of the settlement, in which it has neither admitted nor denied the agency’s allegations.
According to a new release from the SEC: “For almost two years, Prosper told tens of thousands of investors that their returns were higher than they actually were despite warning signs that should have alerted Prosper that it was miscalculating those returns.” The 14-year-old, San Francisco-based company “excluded certain non-performing charged off loans from its calculation of annualized net returns” that it communicated to investors from around July 2015 through May 2017.
The mistake owed to a coding error that excluded the defaulted loans from its computations, the SEC said, causing Prosper to overstate its annualized net returns to more than 30,000 investors on individual account pages on its site and in emails soliciting additional investments from investors.
The SEC added that “many” investors decided to make additional investments based on the overstated annualized net returns and the “Prosper failed to identify and correct the error despite [its] knowledge that it no longer understood how annualized net returns were calculated and despite investor complaints about the calculation.”
The settlement is the second for the SEC in two week’s time. On April 2, the SEC announced that the founder and former chief executive of Jumio has agree to pay the agency $17.4 million to settle charges that he defrauded investors in the mobile payments and identity verification start-up before it went bankrupt.
Building a startup is incredibly tough. There are the constant ups and downs, the moments of sheer ambiguity and terror. And so, few moments in a startup’s life are as triumphant — and crystal clear — as closing a round of funding. Yes, yes, raising venture capital shouldn’t be celebrated as a milestone, and the focus should always be on product and users … but it just feels so damn good sometimes just to feel that sense of euphoria: I built something, and now others are giving me potentially millions of dollars to shoot for the stars.
Unfortunately, that clarity is increasingly vanishing. First, “closing a round” is rarely as sharp a distinction as it used to be. Seed rounds (and even later-stage rounds) are often raised over extended periods of time, with many partial closings conducted as new angels and seed funds come to the (cap) table.
Then there is also the growing disconnect between raising capital and the actual announcement of that fundraise. Founders are trying to remain under stealth for longer periods of time to hide from competitors, and they want to message their news in a careful manner.
All of which means that the Form D filed with the Securities and Exchange Commission when closing an exempt fundraise (aka venture rounds) is no longer as simple a process as it once was.
Lawyers will state publicly that startups should always file their legally mandatory paperwork (that’s probably also a good rule for life). The reality, though, is pretty much the opposite when you talk to startup attorneys in private.
Here’s the secret about Form D filings today: the norms in Silicon Valley have changed, and Form D filings are often filed late, not at all, and many startups are advised to lie low in the hopes of avoiding stricter SEC scrutiny. What was once a fait accompli is now a deliberative process, with important decision points for founders.
Extra Crunch contacted about two dozen startup attorneys, from the biggest firms in the industry to the one-person shops with a shingle out front. Getting straight answers here has been tough, if only because no lawyer really wants to say out loud that they actively recommend their clients violate government regulations (there is that whole law license thing, which apparently lawyers care about).
Practically all of these conversations were done off-the-record and not for attribution, since as one lawyer said, “the last thing I need is the damn SEC sending our firm a nastygram.” Other firms wholly swore us off from even discussing their Form D cultures.
Full disclosure: I am not an attorney, and while I had attorneys read over this draft, this does not constitute legal advice, particularly specific legal advice for your specific startup and situation. Get inspiration from this analysis, but always (really, truly, always) consult qualified legal counsel to answer legal questions about your startup.
With that said, here is our guide to the new world of venture capital securities filings.
As part of a September settlement, Musk promised to get sign-off from Tesla lawyers for any tweets that “contain, or reasonably could contain” material information—legal jargon for information that’s significant for people trading Tesla’s stock. The SEC argues that Musk’s February tweet, stating that Tesla would produce “around 500k” vehicles in 2019, violated that requirement.
Musk disagrees. He argues that he was merely repeating Tesla’s earlier production estimates. And he insists he was entitled to use his own judgment to determine the information was not material—and therefore didn’t require pre-approval by Tesla’s lawyers.
The Securities and Exchange Commission heaped scorn on Elon Musk and his legal arguments in a Monday legal filing. The agency is asking New York federal Judge Alison Nathan to hold Musk in contempt for tweeting a projection of 2019 vehicle output without first getting the tweet approved by Tesla’s lawyers.
Musk has been battling the SEC since last August, when he tweeted that he had “funding secured” to take Tesla private. That turned out to be untrue, and it’s illegal to publish inaccurate information that has the potential to move markets. Under the terms of a September deal, Musk paid a $20 million fine and gave up his role as the chairman of Tesla’s board (Tesla paid an additional $20 million).
Musk also promised to have Tesla lawyers review future tweets that could contain information that is “material”—that is, significant enough to affect the price of Tesla’s stock.
Tesla CEO Elon Musk is in blatant violation of a settlement agreement reached last year over securities fraud allegations, the U.S. Securities and Exchange Commission said in a biting response to the court that argued the billionaire entrepreneur be held in contempt.
The response, which was filed late Monday, is the latest salvo in the agency’s fight with Musk that was sparked by the now infamous “funding secured” tweet. The SEC filed a complaint in federal district court in September alleging that Musk lied when he tweeted on August 7 that he had “funding secured” for a private takeover of the company at $420 per share.
Musk and Tesla settled with the SEC without admitting wrongdoing. Tesla agreed to pay a $20 million fine; Musk had to agree to step down as Tesla chairman for a period of at least three years; the company had to appoint two independent directors to the board; and Tesla was also told to put in place a way to monitor Musk’s statements to the public about the company, including via Twitter.
It’s that final point about Musk’s use of Twitter that has raised the SEC’s hackles. Last month, the SEC asked a judge to hold Musk in contempt for violating the settlement agreement. The SEC argued that a tweet sent by Musk on February 19 violated their agreement. Musk is supposed to get approval from Tesla’s board before communicating potentially material information to investors.
Musk tweeted Feb. 19 that Tesla would produce “around” 500,000 cars this year, correcting himself hours later to clarify that he meant the company would be producing at an annualized rate of 500,000 vehicles by year end.
The next morning, Tesla announced that its general counsel, Dane Butswinkas, was leaving after just months on the job. Butswinkas said in a statement that he was “grateful for the opportunity” to work with Musk and Tesla and that he plans to return to the Washington, D.C. law firm for which he previously worked 30 years.
The SEC said in this latest response that it was stunned to discover that Musk had not sought pre-approval for a single one his tweets about Tesla.
The Court-ordered pre-approval requirement for Musk’s written communications lies at the heart of the settlement. Musk’s unchecked and misleading tweets about Tesla are what precipitated the SEC’s charges, and the pre-approval requirement was designed to protect against reckless conduct by Musk going forward.
It is therefore stunning to learn that, at the time of filing of the instant motion, Musk had not sought pre-approval for a single one of the numerous tweets about Tesla he published in the months since the Court-ordered pre-approval policy went into effect.
Many of these tweets were about the topics specifically identified by Tesla in its own policies as potentially material to shareholders. Musk reads this Court’s order as not requiring pre-approval unless Musk himself unilaterally decides his planned tweets are material. His interpretation is inconsistent with the plain terms of this Court’s order and renders its pre- approval requirement meaningless.
Musk has argued that the Feb 19 tweet was “immaterial” and complied with the settlement. He also said the SEC’s effort to find him in contempt infringed on the First Amendment and his right to free speech. The SEC has rejected that argument. “Submitting his written statements for pre-approval does not, as Musk baldly asserts, mean that he is prohibited from speaking,” the SEC wrote in its reply to Musk’s order to show cause.
The SEC told a judge Monday that Musk has regularly published substantive information about Tesla and its business in tweets, beyond the February 19 instance. The SEC pointed to tweets about Tesla vehicle tax credits and pricing, vehicle maintenance costs, plans for expansion of charging stations internationally, the EPA rating of Tesla vehicles, construction and production plans for a new Shanghai factory, and the results of government safety testing of Tesla vehicles as evidence of Musk’s non compliance.
The U.S. Securities and Exchange Commission (SEC) is pursuing a contempt order against Tesla Inc CEO Elon Musk, saying he violated a fraud settlement by tweeting material information without preapproval, sending the firm’s shares down 5 percent.
The Securities and Exchange Commission has asked a federal judge to hold Elon Musk in contempt for tweeting last Tuesday that “Tesla made 0 cars in 2011, but will make around 500k in 2019.” In reality, Tesla only expects to produce 400,000 cars in 2019. And the SEC argues the tweet ran afoul of an October settlement requiring Musk to seek pre-approval from Tesla lawyers before tweeting out potentially market-moving information.
Musk agreed to this restriction to settle an SEC lawsuit over a previous tweet in which Musk claimed that he had “funding secured” to take Tesla private at $420 per share. The public soon discovered that Musk had not actually secured funding for such a transaction, and federal securities laws make it illegal for the CEO of a publicly-traded company to publish misleading market-moving information.
In his settlement with the SEC, Musk agreed to pay a $20 million fine and give up his position as the chairman of Tesla’s board. And to make sure Musk didn’t mislead investors again, the SEC required Tesla to develop a process for pre-approving all Musk tweets that contain potentially market-moving information.