Visionary, eccentric billionaire, and an avid tweeter. Elon Musk is many things to many of us. He has undoubtedly been one of the most successful entrepreneurs in recent history. And although he already has his hands full as the CEO of electric car company Tesla and aerospace manufacturer SpaceX, he seems to have time to pick up one more title — troll and violator of corporate disclosure laws.
Recently, Musk has gotten in trouble with the United States Securities Exchange Commission (SEC) multiple times. In 2019, Musk agreed to a deal with regulators that called for Tesla’s lawyers to “pre-approve written communications, including tweets with material information about the company”.
But Musk has a well-known disdain of financial regulators. In spite of the SEC settlement, he has continued to let loose a stream of tweets, which have sent both Tesla and cryptocurrencies on a rollercoaster ride.
Musk should be subject to the same set of financial regulations that everyone else is held up to. So who gives Musk such power in the realm of Twitter?
We do. Both retail and institutional investors appear to react to Musk’s tweets about the market, be it due to religious zeal for him or a rational analysis of future Tesla’s corporate policy.
After the announcement of Tesla’s purchase of bitcoin, its price skyrocketed. Tesla reported its quarterly profit through March of 2021 from sales of bitcoin of over US$100 million (its initial holdings worth US$ 1.5 billion rose to around US$ 2.5 billion, but has since returned to around the initial value).
Take the case of Musk’s tweeting that the stock was too high on 1 May 2020. The tweet prompted a US$13 billion decline in the Tesla’s market value. The fact that the stock price later recovered to greater heights is not a consolation. If anything, it raises the question of whether Musk purposely manipulated the stock price down in anticipation of future good news, representing a buying opportunity for himself and those he may wish to let in on the deal.
Should Regulators Step In?
Who finances the profit? Again, we do. So, are we happily helping billionaires get richer, or are we unwitting participants in a market manipulation scheme? If it’s the latter, what can regulators do about it? The issue at hand is about equity (the concept, not the financial instrument).
Regulation on corporate insiders is in place for a reason. As these insiders have access to corporate information that others do not have, their words in non-official channels could lead to large effects on the stock price and an unfair advantage for some.
It turns out that they do not need new rules for tweeting. They just need to enforce existing regulations better.
Musk said that he started SolarCity, Tesla, and SpaceX for the betterment of humanity, but his tweets that affect the financial well-being of stock market participants can hardly be said to achieve the same purpose. Billions of dollars of investments hinge on whether a tweet has a happy emoji or sad emoji. That is a lot of risk.
What makes Elon Musk special as an influencer, compared to the likes of Justin Bieber, is that he is a corporate insider. He is privy to inside information, while the other type of influencers only use public information. Unlike the latter, the economic consequences of trolling by corporate insiders is more serious.
So what can we – as a society – do about it? We can either allow the markets to function and correct mistruths or more aggressively enforce Musk’s violations of corporate disclosure policy.
Case for Less Regulation
The former solution requires less regulator activity, tolerates the arbitrary corporate disclosure, and relies on financial incentives of market participants to “correct any mistruth.” Operationally, it means that regulators should reduce short-sale constraints i.e. restraining the sale of stock that the seller does not own. Currently, investors can correct underpriced stocks by buying, but face restrictions when trying to bet against stocks that they think are overpriced. Academic research has shown that short-sale constraints appear to increase stock mispricing and the probability of a stock price crash.
But given the public perception of short-sellers, reducing short sale constraints doesn’t appear to be a viable option. Since the 1930s, the US SEC has taken the stance that short-sellers may manipulate markets. Moreover, in times of financial crises and illiquidity, prices may overreact to bad news and plummet further than their fundamental value.
It doesn’t help that movies like The Big Short portray short-sellers betting against the US housing market as antiheroes. In fact, the GameStop and AMC saga originated from retailer investors’ desires to take on short sellers.
Case for More Enforcement (Not More Regulation)
Because the first possibility for reducing financial market frictions does not seem practical, the alternative is to enforce existing financial regulations more stringently. Importantly, this solution does not call for more financial regulation and should be politically easy to enact. Given existing rules on short sales, no reasonable free-market advocate would accept allowing corporate insiders to take advantage of their position to spread misinformation or unverified numbers.
Recent tweets and financial markets have also appeared to induce the decentralised hacktivist group Anonymous to chimed in. In a four-minute video, the group states that Musk was “constantly trolling” and that “millions of retail investors were really counting on their crypto gains to improve their lives… Of course, they took the risk upon themselves when they invested, and everyone knows to be prepared for volatility in crypto, but your tweets this week show a clear disregard for the average working person.” Whether Anonymous will employ more dramatic efforts to stop Elon Musk from tweeting raises another concern: do these kinds of influencers pose a systematic risk?
Concentrating public opinion, market sentiment, or information flow to a handful of sources raises the question of whether regulators should be concerned that influential nodes in information or social networks may be hijacked by bad actors. Indeed, a quick Twitter search reveals numerous fake Elon Musk accounts touting various cryptocurrency scams. The Federal Trade Commission reports that these impersonators stole more than US$ 2 million over the past six months alone.
So, regulators should not hesitate to apply the rule of law. The very essence of the rule of law is that everyone should play by the same rules. Whether it is tweets on bitcoin or Tesla, Musk should be subject to the same set of financial regulations that are imposed on all CEOs and corporate insiders. A concern is that if regulators do not act in time, frustrated participants and other bad actors may take it upon themselves to affect a chance.