SEC Sues Elon Musk To Enforce Testimony For Twitter Probe

Key takeaways

• The SEC is suing Elon Musk to testify in its ongoing Twitter probe after he missed a scheduled date
• Lawyers for Musk said the investigation is “misguided”
• The news comes as a new investment vehicle from activist investor Bill Ackman could take X public again

Can Elon Musk catch a break right now? The U.S. Securities and Exchange Commission (SEC) has sued the billionaire and CEO of X, formerly known as Twitter, to actually turn up to testify in the probe they’ve launched.

The investigation is all about whether any securities laws were broken during Twitter’s sale to Musk, which was a nail-biting time for the company involving a lot of litigation. But it’s just the latest in a long line of bad blood between Musk and the SEC, who have come to blows many times before.

Keep reading to discover why Elon’s pressed about the SEC, the probe into his Twitter takeover and an intriguing rumor that could change the company’s path.

Why is the SEC suing Elon Musk?

The SEC sued Elon Musk in a San Francisco court on Thursday in a bid to get the Tesla, SpaceX and X CEO to sit down with them and testify about his Twitter acquisition last year.

The investigation itself is about whether any securities fraud happened if anyone bought Twitter shares last year as Elon was buying up stock in the social media platform. Elon failed to show up as a September 15 testimony date, which, obviously, the SEC didn’t appreciate.

The regulatory body claims new evidence has come to light and that while Musk has already testified twice in July 2022, he hasn’t returned since. The SEC also says it’s tried hard to find a time and place where Elon could testify, including the agency’s office in Fort Worth, Texas, which is close to Musk’s Austin home.

“Musk’s ongoing refusal to comply with the SEC’s administrative subpoena is hindering and delaying the SEC staff’s investigation to determine whether violations of the federal securities laws have occurred,” SEC attorneys wrote.

Musk’s people, however, have a different view. His attorney, Alex Spiro, said in a statement that “the SEC has already taken Mr. Musk’s testimony multiple times in this misguided investigation—enough is enough.” Also, Elon literally used his new biography as a reason not to testify – take from that what you will. (And no, the SEC didn’t like that excuse.)

A hearing on the probe is set to occur on November 9, though the SEC has said it hasn’t found any violations so far. We’ll find out soon enough whether a judge sides with the regulators or the world’s richest man.

What’s the context behind the SEC Twitter probe?

Musk had some choice words to say about the SEC’s latest move. “A comprehensive overhaul of these agencies is sorely needed, along with a commission to take punitive action against those individuals who have abused their regulatory power for personal and political gain. Can’t wait for this to happen,” he posted on X.

Before Musk bought Twitter, he bought up shares in the formerly public company. Elon increased his stake in the social media firm to 9.2% on March 14 2022 and disclosed the new stake in April. At the time, he said he was a passive investor and didn’t intend to take over the company.

That sounds above board, but the SEC has a rule in place that anyone with more than a 5% stake in a publicly traded company must disclose it in 10 days. The SEC then sent an inquiry to Musk because he used the wrong form to disclose the new stake.

If you didn’t already guess, Musk and the SEC have a tumultuous relationship going back years. In 2018, the billionaire was badly burned when he settled a fraud investigation over his infamous “funding secured” tweets about taking Tesla private. Musk paid a $20 million fine, gave up his role as Tesla’s chairman and agreed to have his posts about Tesla pre-approved by lawyers. Elon has since tried to terminate the settlement in court, but the judge denied the plea.

The Twitter probe isn’t the only ongoing investigation into a Musk-owned company. The SEC is looking into whether Tesla funds have been used on a secret internal project which is rumored to be a house for Elon. The Justice Department has also joined forces with the SEC to determine if Tesla oversold its Autopilot self-driving system to customers.

You can see why Elon felt the need to call the agency the “Shortseller Enrichment Commission”, but when you’re the world’s richest man, there’s bound to be a lot of scrutiny.

Could X go public again?

Ever heard of a SPARC? It’s SPAC 2.0, and one activist investor has one ready to go for X. Hedge fund manager Bill Ackman’s company Pershing Square has secured regulatory approval for the new investment vehicle, aiming to merge with a private company and raise at least $1.5 billion.

The SPARC would find a target company first, whereas a SPAC raises money from investors first before approaching a business. Ackman says he hasn’t approached X yet about the deal, though Elon has previously commented that he intends to take X public again.

Ackman also seems to think X might be interested in the deal. He told CNBC that the social media company’s eye-watering $13 billion debt load might be a good enough reason to consider the investment offer. There’s also the not-so-small matter of X’s value, which has significantly declined since Elon took over the company a year ago for $44 billion and is now valued at around just $8 billion due to a 60% drop in advertising.

Is a SPARC risky for X?

It’s worth noting that SPAC merger numbers have dropped off a cliff since high-profile examples of the investment vehicle have proven to be unprofitable at best and disastrous for investors at worst. EV maker Lucid Group is one of the biggest failures, generating $4.5 billion in capital and a $24 billion valuation through a SPAC and then seeing its share value drop over 77% since.

According to University of Florida finance professor Jay Ritter, the 101 SPAC IPOs from last year saw their share prices decline by an average of 59% in the 12 months following the debut. That might be why there have only been 22 so far in 2023.

Okay, we’re talking about a new SPARC, not a SPAC. Ackman is keen to point out that this shiny new merger idea protects investors rather than favoring insiders and sponsors of a deal. The main difference is that a SPARC has ten years to complete a deal compared to a SPAC’s two years, and the sponsors can only sell their shares after prices are 20% higher three years after the merger.

Semantics aside, the SPARC is an untested investment idea that X would be the guinea pig. Investors might not be keen to risk money, having already been burned by SPACs.

The bottom line

The SEC suing someone to testify is an unusual move. With such an acrimonious relationship between the regulators and Musk, it’s hard to tell whether it’s justified.

As for the potential SPARC merger and taking X public again, it’s all rumors at this point but could be a lifeline for the social media platform as it struggles with its financial position. Watch this space on both counts.