At a time when breaking norms has become the new normal, the recent battle between Tesla’s charismatic chief executive, Elon Musk, and the Securities and Exchange Commission’s regulatory enforcers captured the attention of the public. Musk’s seemingly deliberate use of Twitter to pick a fight with the SEC, combined with his track record of fostering paradigm shifts in several industries, suggested to securities lawyers and white-collar practitioners that we would soon see something new under the sun. It was not to be. Although Musk himself has earned a reputation for being incredibly innovative, the SEC’s case against him was not. We believe the absence of innovation provides an important opportunity to consider the road not taken, at least not yet.
Social Media and Securities Violations
Since its adoption in 1942, SEC Rule 10b-5 has been the SEC’s principal tool for enforcing the securities laws. The rule makes it unlawful “(a) to employ any device, scheme, or artifice to defraud, (b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.” This broad formulation has made the rule flexible enough to be applied to all manner of deceptive conduct and to keep pace with evolving information technology. The key to such adaptability is that the rule is agnostic with respect to the communication medium or technology being employed. Newspaper, radio, television, telephone, fax, email and the internet have been easily assimilated into the regulatory regime.
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