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Why Elon Musk's tweets matter to the SEC What are the stakes when a CEO talks business on social media? A tweet by Tesla chief

Why Elon Musk's tweets matter to the SEC

What are the stakes when a CEO talks business on social media? A tweet by Tesla chief Elon Musk last year prompted the Securities and Exchange Commission to file charges against the tech mogul, first for violating SEC rules and then forviolating a settlement agreement.

The SEC says the tweet caused "harm to investors," but Musk claims "something is broken with SEC oversight."

Who is right is a matter for the courts to decide. But the dispute highlights the importance of SEC rules for average investors and the stumbling blocks the rules can pose in a seemingly less restrained social media era.

How we got here

The SEC first filed charges against Musk in September for distributing misleading information.

Muskhad tweetedin August that he secured funding to take Tesla private at $420 per share. Funding had not been secured, although Musk later said he was talking to a Saudi sovereign wealth fund and thought the funding would come through.

Musk and the SEC agreed to a settlement: Musk would pay a $20 million fine, step down as Tesla's chairman for three years and get pre-approval of his tweets from Tesla's legal counsel.

Then, last month, Musktweeted: "Tesla made 0 cars in 2011, but will make around 500k in 2019."

The problem with his tweet? Tesla is not expected to make 500,000 cars this year. Hours later, Musk clarified the tweet, saying by the end of 2019 Tesla would be making cars quickly enough that the company could make 500,000 cars per year if it retained that rate of production.

But it was too late. The SEC filed a motion saying Musk violated the terms of their agreement and asked a judge to hold him in contempt of court.

Musk has until today to offer a response rebutting the charge.

That deadline comes on the heels ofnewsthat a former Tesla employee has filed a whistleblower complaint with the SEC about Musk's August tweet, among other matters, according to a New York attorney.

Who is protected by the SEC rules

Stock exchanges like the NASDAQ are regulated by the SEC, and companies that are publicly traded like Tesla must abide by SEC rules.

Those rules, designed to protect both investors and the entire securities exchange system, forbid company leaders from making"untrue" or "misleading" statementsin connection with their stock.

If investors do not believe they are getting correct information, they might lose trust in the entire system.

"The idea is if people are buying and selling stock, you want the marketplace to be fair and for everyone to be treated equally," said Michael Liftik, a former deputy chief of staff at the SEC.

If some investors get information sooner than others, that gives them an unfair advantage. If investors get incorrect information, they could make bad investments. And if investors do not believe they are getting correct information, they might lose trust in the entire system.

That could have disastrous results. About 54 percent of Americans are invested in the stock market, many of them through 401(k)s or other retirement accounts.

How social media comes into play

Advertisements, newspapers and letters are all mentioned as regulated means of communication in some of theoriginal SEC rules, dating back to the 1930s. More recently the SEC has also clarified how newer technology can be used.

In 2013, for example, theSEC saidthat "most social media are perfectly suitable methods for communicating with investors."

But whatever a company says through social media must still meet the same standards as other communications. Remarks on social media must be accurate and cannot be given to some investors before others.

SEC enforcement officials have some discretion before prosecuting a case. They are likely to focus on whether an inaccurate tweet moved the stock market or created an unlevel playing field, said Liftik, who worked on the 2013 SEC rule relating to social media.

When Musk inaccurately implied on Twitter that he had funding to take Tesla private, the stock shot up more than 10 percent from the previous day. That sent the SEC a red flag, and itfiledcharges against Musk the next month.

When Musk tweeted again last month about Tesla's production rate, the market was already closed, and he tweeted the correction before the market reopened. So it could be argued that his tweet did not harm investors.

But the SEC's decision to take action anyway was "not about the substance," Liftik said. "It's about the process."

What's unique about Musk's situation

Musk's defenders argue the Tesla co-founder is anunconventional visionarywho should not be restrained. They've also argued the SEC case couldstifle innovation.

Urska Velikonja, a law professor at Georgetown University who focuses on securities regulation and enforcement, disagrees.

"If he thinks he needs an outlet, he should take up jogging. This doesn't seem to stifle the creativity of anyone else."

"The [SEC] rules have nothing to do with [Musk] developing awesome cars," she said. "If he thinks he needs an outlet, he should take up jogging. This doesn't seem to stifle the creativity of anyone else."

Numerousgovernment reportsover the years indicate the SEC has been routinelyunderstaffedandunderfunded. That means it likely has to make decisions about whether to spend its resources going after smaller companies for relatively minor violations.

But legal experts say Musk, who has 25 million Twitter followers, should realize he's a high-profile executive with a large sphere of influence.

Whatever he says "is going to be picked up and used as some kind of guidance with regard to the company and its earnings or future activities," said Richard Schulman, a partner at the New York-based law firm Duval and Stachenfeld.

If the SEC did not file its most recent complaint, Liftik said, that could send a bad message to other companies that it was not serious about enforcing its rules.

(keep your responses concise. please dont use complex terms/phrases. keep it simple so it's easy for me to understand )

Review the article and summarize its key points.

Answer these Questions:

Do you believe the SEC was justified in taking this action against Tesla and Elon Musk?

Were the consequences of Elon's behavior reasonable under the circumstances?

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