Securities & Exchange Commission vs. Elon Musk & the First Amendment.

• Author: Markham, Jerry W.

[T]h e best test of truth is the power of the thought to get itself accepted in the competition of the market. ... That at any rate is the theory of our Constitution. (1)

Abstract

The Securities and Exchange Commission ("SEC") is responsible for administering the federal securities laws, which mandate the content and timing of information disseminated to shareholders of public companies. SEC regulations adopted under those statutes are claimed to be exempt from First Amendment protection because they only regulate "commercial" speech. Such speech has been historically denied full First Amendment protection. However, an SEC enforcement action brought against Telsa, Inc. and its chief executive officer Elon Musk demonstrates the danger of the SEC's unrestrained application of the commercial speech doctrine to viewpoint-based speech. Through that action, the SEC is causing the censorship of Musk's "tweets" on Twitter concerning his often-controversial views on the role and success of Tesla's electronic automobiles in combating climate change, one of the most critical political and social issues of our time. This Article argues that the SEC should cease regulation of viewpoint-based speech on Twitter and other social media. The rough and tumble world of social media, and its now central role in the public debate on vital political and social issues, deserves full First Amendment protection.

CONTENTS INTRODUCTION I. THE ELON MUSK TWITTER CONTROVERSY II. THE FIRST AMENDMENT AND "COMMERCIAL SPEECH" III. THE SEC AND THE FIRST AMENDMENT A. The Core Mission of the SEC is to Compel and Censor Commercial Speech B. SEC Licensing Requirements and the Financial Press C. Effect of Disclaimers on SEC Censorship Requirements D. SEC Speech Restrictions Negated by Public Debate E. SEC Mandated Self-Censorship Through Monitoring Requirements F. SEC Regulation of Speech through Demeanor and Facial Expressions G. SEC Compelled Speech on Political Issues--Proxy Regulations H. SEC Compelled "Shaming" Speech--Proxy Votes on Social Issues I. SEC Compelled Shaming Speech--Executive Compensation Proxy Votes J. SEC Compelled Shaming Speech--"Conflict Diamonds" K. SEC Compelled Shaming Speech--Climate Change Disclosures IV. FIRST AMENDMENT PROTECTION FOR MUSK ON TWITTER CONCLUSION INTRODUCTION

The Securities and Exchange Commission ("SEC") is responsible for the administration of the federal securities laws, which mandate the content and timing of information disseminated to shareholders of public companies. (2) SEC regulations are generally held to be exempt from First Amendment protection because they regulate only "commercial" speech. (3) Such discourse is said to be unworthy of the broad First Amendment protections given to political and social speech. (4) An SEC enforcement action brought against Tesla, Inc. and its chief executive officer Elon Musk demonstrates the danger of the SEC's unrestrained application of the commercial-speech doctrine to viewpoint-based speech on social media. (5) Through that action, the SEC is effectively censoring Musk's "tweets." (6) Those postings concern his often controversial views on the role of Tesla's all-electric automobiles in combating climate change, one of the most important political and social issues of our time. (7)

This Article argues that the SEC should cease regulating viewpointbased speech on Twitter and other social media. The rough-and-tumble world of those Internet-based forums and their central role in the public debate on critical social and political issues deserve full First Amendment protection.

1. THE ELON MUSK TWITTER CONTROVERSY

   Tesla's core mission is "to accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible." (8) As Tesla's CEO, Elon Musk is the leader of that effort. (9) Although Tesla's popular production models did not start appearing until 2013, (10) Tesla delivered to consumers roughly 245,000 all-electric vehicles in 2018. (11) Tesla was then the world's leading producer of all-electric motor vehicles, (12) allowing the company to boast that it was "starting to make a tangible impact on accelerating the world to sustainable energy." (13)

   Musk is an avid user of Twitter. (14) Many of his tweets express his unique and controversial viewpoints (15) on Tesla's efforts to transform the largely fossil-fuel-based automobile industry into a more eco-friendly industry. (16) His tweets are often unstructured, erratic, inaccurate, indecorous; they are also typically scathing about his critics. (17) Nevertheless, Musk's tweets are of broad public interest, as evidenced by the fact that he has some twenty-eight million followers on Twitter. (18) Those tweets are also intensely scrutinized, criticized, and widely reported on by mass media and Internet blogs. (19)

   The SEC brought an enforcement action against Tesla after Musk tweeted in August 2018 that Tesla had secured financing that would allow it to buy out public shareholders at a premium over existing market prices. (20) Tesla's stock price then jumped over six percent, but the plan to go private, if there ever was one, was abandoned a few weeks later. (21) The SEC then sued Tesla and Musk, charging that his tweet had misled investors because the funding for such a transaction was not in place. (22) The SEC sought to remove Musk from the management of Tesla, bar him from acting as an officer or director of any public company, and subject him to large civil fines. (23)

   This was not the SEC's first effort to suppress an automotive genius. Shortly after World War II, an SEC investigation led to the indictment of Preston Tucker, a flamboyant figure who was then building an ultra-modernistic automobile with advanced safety features. (24) Tucker sold stock to the public to fund this venture, but he ran afoul of the SEC. The SEC claimed that Tucker was incapable of producing any actual cars, which resulted in the Justice Department indicting Tucker and several of his executives. (25) After a lengthy trial, the defendants were acquitted of all charges. (26) As portrayed in a popular movie, however, the government's action destroyed the company, which was able to produce only fifty-one cars before its failure. (27)

   Musk proved to be a wilier target. Initially, he vowed to contest the SEC's charges, contending that the agency was interfering with his First Amendment rights. (28) But calmer heads prevailed. Removing Musk from Tesla's management posed a serious threat to the company's survival and likely would have evaporated billions of dollars in shareholder value. (29) Instead, Musk and Tesla settled with the SEC. (30) In exchange for allowing him to continue as Tesla's CEO, Musk forfeited his First Amendment rights by agreeing to submit his tweets to an undefined oversight process at Tesla that would ensure the tweets conformed to SEC speech mandates before their publication. (31)

   Musk was unrepentant after settling the SEC charges, as reflected in a tweet in which he derided the SEC for failing to protect Tesla shareholders from attacks by short-sellers. (32) Musk sarcastically asserted that the SEC's acronym actually stands for the "Shortseller Enrichment Commission" and that it was "doing incredible work" in aiding those traders. (33) Musk also revealed on national television that no one at Tesla was reviewing his tweets, stating: "I want to be clear. I do not respect the SEC." (34)

   Less than six months after its initial complaint, the SEC initiated a contempt order against Musk. (35) The subject of the contempt proceeding was a Musk tweet, which stated that Tesla would make around 500,000 cars in 2019. (36) This was an increase of 100,000 cars over an earlier projection by the company. (37) Musk corrected that tweet a few hours later by stating that Tesla would deliver 400,000 cars in 2019, but that it would be producing at a rate of 500,000 cars per year at year-end. (38) Nonetheless, the SEC sought a contempt citation because Musk's tweets had not received prior approval from Tesla, a step the SEC claimed was required by the prior settlement agreement. (39) Within one day Musk tweeted that the SEC's action against him had harmed Tesla shareholders by pushing Tesla's stock price down, and he charged that "[something is broken with SEC oversight." (40) He further argued that the First Amendment protected his tweets and that the company had already publicly announced the substance of his message. (41)

   The judge hearing the SEC contempt motion ordered the parties to seek a settlement. (42) A law school professor then publicly advocated imposing more explicit and defined prior restraints on Musk's speech, i.e., that Musk's tweets, before their dissemination, be reviewed by an attorney versed in SEC censorship requirements who would act as the SEC's "baby sitter" for Musk. (43) That was the course the parties took through an amended settlement agreement in which Musk agreed to submit his tweets for review and prior approval by an "experienced securities lawyer," (44) who was quickly given the derisive sobriquet of "Twitter sitter." (45)

   This settlement was considered to be another victory for Musk because he was allowed to continue in his role as Tesla's CEO and no further sanctions were ordered. (46) Nevertheless, it was a loss for First Amendment-protected speech. Anyone dealing with corporate lawyers on SEC disclosure issues knows that such review is a time-consuming process that can take days or even weeks. Rather than submit to that ordeal, and as a direct result of the SEC injunction, Musk self-censored the volume and content of his tweets. (47) As his attorneys advised the court during the SEC contempt proceeding, Musk was tweeting half as often as he did before the SEC injunction. (48)

2. THE FIRST AMENDMENT AND "COMMERCIAL SPEECH"

   The First Amendment allows citizens to advocate controversial changes in society without submitting to...