Was Elon Musk’s Poll A Regulatory Snafu?

Elon Musk’s poll to survey his Twitter audience about whether or not he should sell 10% of his Tesla stock (TSLA) has caused a media frenzy, and the company’s market valuation to plunge. The stock — which was already identified as driving up the S&P 500 index’s exposure to disruptive technology — is again volatile. With about a $60 billion reduction in the company’s market value on Monday, questions started to be raised as to whether the CEO may have violated his settlement with the US securities regulator (SEC). [Full disclosure: I own some Tesla stock. Nothing in this article is investment advice of any kind.]

The strange series of events began after Senator Ron Wyden (D-OR) floated a proposal to tax investments every year for the country’s billionaires — US stock investments are taxed currently only when they are sold. Wyden walked back the idea, acknowledging that his party’s narrow Congressional margin would make passing such a bill very difficult. However, he pursued the argument that the US tax system is unfair, insisting that the über rich should pay a percentage of their net worth to the US government every year, whether or not they sell their shares.

Billionaires have been able to pay low effective tax rates, in part, because the value of their company stock holdings is not subject to capital gains taxes until they are sold. Many, like Musk, also don’t make much “income” — they simply borrow millions or billions of dollars at low interest rates, with the loans secured by their high wealth in shares. As long as the value of their shares grows more than the interest on their loans, their wealth climbs and they live as luxurious of a life as they want while paying very little in taxes.

Musk vehemently opposed the plan Wyden proposed and shared his discontent in a tweet. “Much is made lately of unrealized gains being a means of tax avoidance, so I propose selling 10% of my Tesla stock,” he wrote to his 63.1 billion Twitter followers. “Do you support this?”

In subsequent Twitter give-and-takes, Musk noted, “I will abide by the results of this poll, whichever way it goes” and “I do not take a cash salary or bonus from anywhere. I only have stock, thus the only way for me to pay taxes personally is to sell stock.” The poll garnered more than 3.5 million votes, and 57.9% of the people voted in favor.

Last month, Tesla became the fifth company to reach $1 trillion in market capitalization, joining Apple, Microsoft, Amazon, and Alphabet. But Tesla shares fell sharply on Monday. By the start of day Wednesday, Tesla stock was listed at $1023.50 per share. Editor’s note: at the time of editing this article, just before publishing, the stock is down 10.3% in the past 5 days and is at $1030.34 (see image at top).

Musk’s Poll Could Move Markets & Spark New SEC Monitoring

Two weeks ago, CNBC commented that the Tesla CEO may soon become the first person with a net worth of $300 billion. That prediction came after Musk added more than $36 billion to his fortune with the Hertz announcement that it would be ordering 100,000 Tesla vehicles to build its electric rental fleet. Tesla shares soared 12.7% soon afterward. Musk, with his recognized ability to move markets with his tweets, noted subsequently that the Hertz deal hadn’t been finalized, and Tesla shares fell sharply afterward. (Though, Hertz responded that it had already started receiving cars. …)

Time passed, memories were short, and, on Monday of this week, Forbes estimated that Musk was the world’s richest person, with a net worth at $304 billion.

Musk owns about 17% of the 1 billion outstanding Tesla shares, according to CBS News. If he sold 10% of his holdings at their current price or so, it would net him somewhere around $20 billion. So the tweet polling his audience reopens the controversy over whether Musk remains in compliance with a US Securities and Exchange Commission (SEC) settlement. In 2018, the SEC charged Tesla with failing to have required disclosure controls and procedures relating to Musk’s tweets. The summation said that Tesla had no disclosure controls or procedures in place to determine whether Musk’s tweets contained information required to be disclosed in Tesla’s SEC filings. The subsequent agreement stated:

  • Musk will step down as Tesla’s Chairman and be replaced by an independent Chairman. Musk will be ineligible to be re-elected Chairman for three years;
  • Tesla will appoint a total of two new independent directors to its board;
  • Tesla will establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications; and,
  • Musk and Tesla will each pay a separate $20 million penalty. The $40 million in penalties will be distributed to harmed investors under a court-approved process.

Tesla lawyers agreed to vet some of Musk’s tweets in advance. The settlement was later amended to clarify when pre-approvals were required, prompted by an unvetted tweet by Musk about Tesla’s vehicle production forecast.

The SEC again admonished Tesla and Musk for allegedly violating terms of the 2019 revised settlement agreement, according to the Wall Street Journal. In a May 1, 2020 tweet, Musk said that Tesla’s stock price was “too high,” and the company valuation promptly fell more than $13 billion. The SEC also at the time pointed to Musk tweets from 2019, where he discussed solar roof production numbers without obtaining pre-approvals. CNBC notes that, while the securities regulators monitored Musk’s use of Twitter amid the pandemic and confronted Tesla via correspondence, the SEC did not file a motion to compel enforcement of the settlement agreement.

Now the new 2021 Musk poll raises questions about whether he is, indeed, in compliance with the 2018 SEC settlement.

Bloomberg suggests that Musk is unlikely to incur the wrath of regulators within the SEC with the recent Twitter poll. Don Langevoort, a securities law and corporate governance expert with Georgetown University Law School, told the Washington Post he thinks Musk’s weekend tweet is unlikely to draw SEC action, given that a Twitter poll isn’t binding. “The SEC in high-profile cases is usually pretty careful to select cases that they are highly confident in winning,” Langevoort said. Ensuring that Musk is acting in the interest of investors would fall to the company’s board, he added.

SEC action may not be initiated for another reason. Musk’s poll may have less to do with a populist vote and more to do with a looming multi-billion-dollar tax bill. CNN reported that Musk is just months out from a deadline to exercise the 22.9 million stock options he received as part of his 2012 compensation package. Performance-based options generally are taxed at the lower capital gains rate, with an important exception — Musk owns more than 10% of Tesla’s total shares.

He had to use them by August 13, 2022 or lose them. And so he did. Musk sold roughly $5 billion worth of Tesla shares on Monday, according to SEC filings. This was his first such sale since 2016 — just days after conducting a Twitter poll asking his fans if he should dispose of 10% of his stake in the electric carmaker. The motivation for Monday’s sale was “solely to satisfy [Musk’s] tax withholding obligations related to the exercise of stock options,” the filing said.

CNN Business posits that the share price also could have fallen Monday partly because of Musk’s sales of almost 1 million shares that took place that day.

By exercising his shares, though, they will be treated as regular income subject to income tax. He’ll find himself facing a tax bill between nearly $11 billion to as much as $16 billion at current share prices. Continued increases in the value of Tesla stock could have pushed his tax bill even higher.

Also, Musk may face California state taxes on top of the federal bill as he still has a major factory and offices in Palo Alto, and Musk spends time working there. Or, perhaps, Musk’s move to Texas means that he will pay no taxes in California on this sale.

Final Thoughts

A major stakeholder announcing plans to sell shares is rarely a good thing for a stock. But many analysts are still bullish on Tesla and Musk, predicting further price increases in the year ahead.

Musk’s poll and tweets aside, it’s important to remember that Tesla is a company that is changing the way we think about transportation. Its influence is moving more than markets — legacy automakers are doing a fast shuffle to remake their manufacturing capabilities to embrace electric vehicle production.

If you want to have a fun retrospective on the power of Musk’s tweets, Fortune outlines “7 Elon Musk tweets that have sent Tesla shares on a rollercoaster ride.”

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