IVAN BACHINSKY—The SEC recently sued Elon Musk over his alleged failure to timely disclose his five percent ownership stake in Twitter. The lawsuit, filed on January 14, 2025, concerns Musk’s purchase of Twitter stock that occurred in early 2022. In that year, Musk began accumulating Twitter shares and had amassed over five percent of Twitter’s common stock by March 2022. The suit, brought pursuant to Section 13(d) of the Securities Exchange of 1934, alleges that Musk failed to file a disclosure statement with the agency that would have made his five percent ownership public knowledge. SEC Rule 13(d) provides, in relevant part:
Any person who, after acquiring directly or indirectly the beneficial ownership of any equity security of a class which is specified in paragraph (i)(1) of this section, is directly or indirectly the beneficial owner of more than five percent of the class shall, within 10 days after the date of the acquisition, file with the Commission, a statement containing the information required by Schedule 13D. 17 CFR § 240.13d-1 (emphasis added) (Note: in 2023, the SEC amended the rule to require disclosure within 5 business days).
Paragraph (i)(1) in turn provides that “equity security” means an equity security registered under Section 12 of the Act but does not include “a class of non-voting securities.” For practical purposes, equity security refers to the common stock of a publicly traded company. Musk filed the disclosure form eleven days after it was due. Therefore, he is almost certainly civilly liable under the SEC’s rules, which have the force of law. Rule 13(d) is a strict liability rule, meaning that the SEC does not need to show intent, merely that the defendant violated the rule—which Musk clearly did.
Unsurprisingly, Musk was not pleased about the SEC bringing this action. He posted on X (formerly Twitter): “Totally broken organization. They spend their time on s— like this when there are so many actual crimes that go unpunished.” Musk and government financial regulators have sparred frequently. For example, one recent court ruling that drew Musk’s ire was a judgment by a Delaware court that overturned a $55.8 billion compensation package for Musk as CEO of Tesla. In response, Musk posted on X, “If the extreme violation of shareholder rights by the activist posing as a judge in Delaware is allowed to stand, Delaware’s entire economy will be destroyed.” He also posted, “If the verdict in my case in Delaware is not overturned, it will be used as precedent in every fake shareholder case for every company incorporated in Delaware for the rest of time!”
Continuing discussion of the recent SEC lawsuit, Rule 13(d) is relevant because an investor’s purchase of five percent or more of a company’s shares sometimes leads to a tender offer—an investor’s offer to purchase shares from stockholders with the intent to acquire a controlling interest in the company. However, the filing requirement also applies to investors seeking to influence or control the company in other ways. In Elon Musk’s case, he later acquired Twitter and renamed it “X,” but this acquisition occurred through a negotiated merger agreement with the company’s board, rather than a tender offer. The SEC alleges that Musk’s failure to timely disclose his five percent interest allowed him to purchase additional shares at artificially low prices. Following his eventual disclosure, Twitter’s share price rose more than twenty-seven percent, reflecting the market’s expectation of significant strategic changes under Musk’s involvement.
