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Elon Musk and Twitter: does SEC regulation really matter anymore?

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An interesting month already for Twitter (NYSE:TWTR): shares are up at $46.56 at time of writing, that’s +41% in the month, which is not a bad return. Much of that has to be attributed to the activities of one individual of course.

In case you have been living under a rock this pas week, Elon Musk has taken a 9.2% stake in Twitter, driving the market cap of the company up by $8bn. Analysts says that the jump in shares provides Twitter with a more realistic valuation, as it is, after all, the ‘world’s town hall’ but this so-called passive investment by Musk could raise some larger questions.

Is this really a passive investment?

Some analysts are calling foul – this is not a passive investment, they argue. Musk filed a 13G form, not a 13D form (the latter is only field with regulators if you are planning on staying passive). The regulatory filing says Musk will be a class 2 director, with a term expiring in 2024, and will not own more than 14.9% of the company’s stock during his tenure (and for 90 days after). Some think he might already own this much.

“Musk could be breaking securities law already by filing in this way…he’s already been tweeting about it in what could only be described as an activist manner, polling people’s opinions on rules and algos,” said Neil Wilson, Chief Markets Analyst with Markets.com. “Either Musk took a passive stake in a company he believes undermines democracy (seems unlikely) or, more plausibly, Musk broke securities law by filing 13G (passive) where he plans to do something about what he regards as a major problem.”

Tweeting post-transaction is becoming a habit for Musk, but he does not seem to be bothered by what the SEC thinks about all this, and has accused the US regulator of misconduct in its investigation of trading by Musk and his brother. The SEC also seems content to allow Musk to do what no other CEO would be allowed to do.

Musk is now the biggest investor in Twitter

The deal now leaves Musk with more Twitter stock than any other single investor, including ETF fund manager Vanguard, which has 8.97%, and Twitter founder Jack Dorsey, who controls 2.25%. The question is now how Musk will exercise his new influence as a so-called ‘passive’ investor: does he agitate for a subscription track and a free speech track, or just the latter? Does he bring  Donald Trump back in from the cold? Dorsey didn’t seem too fussed, saying: “I’m really happy Elon is joining the Twitter board! He cares deeply about our world and Twitter’s role in it. Parag [Agrawal] and Elon both lead with their hearts, and they will be an incredible team.”

Musk has lately been offloading Tesla stock and buying Twitter. In effect he is now shorting Tesla and going long Twitter in a massive pairs trade. Investors in Tesla don’t seem bothered: the stock is up 32% over the last month.

How active a shareholder will Musk really be?

Investors will be wondering just how active a role Musk will be playing. Dorsey’s comments above, coupled with Musk’s influencer role on Twitter, indicate that he is already playing a more active role than his regulatory filing would indicate.

“Effecting changes to content policies seems to be the main area for Musk, not trying to run the show,” said Wilson at Markets.com. “He has enough on his place with Tesla and SpaceX anyway.”

The limit on his maximum holding in Twitter for the next couple of years seems to remove the likelihood of a bid for the entire company for the next two years, but a take private move might be an option. “It was, as we assumed, definitely not a passive investment…so what does the SEC do about it,” asked Wilson.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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