Tesla is likely to face investigation by US securities market regulators following the CEO Elon Musk’s extraordinary tweet that he had “funding secured” to take the company private, according to a media report.
Shares in the money-losing carmaker fell sharply in New York after the Wall Street Journal reported that the Securities and Exchange Commission is making “inquiries” and quoted former SEC lawyers as saying that investigators were looking for documentation to back up Musk’s claims.
According to the Journal, the SEC’s inquiries originate from the agency’s San Francisco office. The SEC declined to comment. If Musk’s claim turns out to be false, he risks civil and possible criminal penalties.
Shares dipped again after Bloomberg reported regulators had been looking into Tesla prior to Musk’s tweets and were now intensifying their scrutiny of Tesla Inc.’s public statements, including statements on manufacturing goals and sales targets.
The specific regulation lawyers believe Musk could have broken in his “funding secured” tweet is 14e-8 of the Securities Exchange Act of 1934, which prohibits publicly traded companies from announcing plans to buy or sell securities if executives don’t intend to complete, don’t have the means to complete, or are trying to manipulate the stock price.
Musk’s claim that he has secured funding, if in fact he does not, could expose him and his company to lawsuits.
“He is claiming there is a specific source of the funding so that had better be true,” the former SEC chairman Harvey Pitt told CNBC. “He has also claimed there is a specific amount available for funding. That has to be true. Otherwise, even if it’s not manipulation, it would be fraud, so he’s got two potential areas of difficulty right there.”
So far, no Wall Street institution has claimed any knowledge of negotiations to raise any of the $70bn it would cost to take the company private.
Musk could have raised the money from a sovereign wealth fund, wealthy individuals or a private equity fund.
According to a statement from six of Tesla’s nine directors, Musk raised the go-private possibility with the board last week. They said he had “addressed the funding for this to occur” without providing details.
Musk has in the past tweeted assertions that sounded like more than they were.
In July 2017, Musk tweeted that he had received “verbal govt approval” to build a high-speed hyperloop connecting New York, Philadelphia, Washington DC and Baltimore. A White House adviser later dampened those claims and said Musk had signaled “excitement” not approval.
After Musk’s Twitter claim on Monday that “investor support is confirmed” to take Tesla private, the California State Teachers’ Retirement System, which owns about 213,000 shares as one of the largest institutional investors in Tesla, said it had not been contacted by Musk or the firm before the announcement.
The “funding secured” tweet has, in any event, focused investors on Tesla’s finances – and Musk’s executive leadership of it.
“If no firmer details emerge investors would likely increasingly debate Musk’s credibility and seemingly unhealthy focus on the shares’ price and volatility, ” wrote Bernstein analyst Toni Sacconaghi in a note to clients.
The company lost nearly $2bn last year, and has burned through about $1.8bn in cash as it ramps up production on the Model 3. At the end of the June quarter, the company had $2.2bn in cash reserves.
Tesla’s stock, which rose 11% on Tuesday after Musk’s statement from $342 to $379, has since dropped back to $352.
If, as some analysts suggest, Tesla’s stock is a measure of confidence in Musk himself, it’s well below the $420 at which Musk said shareholders would be bought at.
“The reason it is trading at a discount is because of uncertainty as to whether the deal will come to fruition,” Efraim Levy, an analyst at CFRA, told CNBC. “If it doesn’t come through, the stock is going to crater.”
But if a buyer emerges, that too could spook the markets, warned Nick Colas at DataTrek Research in a client note, since it could mark a risk-taking peak for corporate America.
Colas compared a Tesla sale to RJR Nabisco’s take-private in 1988, AOL’s purchase of Time Warner in 2000 or Goldman Sachs’ bundling of toxic mortgages in 2007, all bad, era-defining deals.
“While we are not superstitious by nature, we do fear this transaction looks an awful lot like other deals done at the peak of prior cycles,” Colas wrote, and gave it a name: “Tesla top”.