Explainer-Five legal questions raised by Elon Musk’s unorthodox share

By Katanga Johnson and Chris Prentice

WASHINGTON (Reuters) -It’s been another wild ride for Tesla (NASDAQ:) investors after billionaire chief executive Elon Musk pledged via Twitter (NYSE:) to sell 10% of his shares in the company. While the unorthodox way he went about it has raised eyebrows, it’s unclear if he or Tesla have broken any rules.

The electric carmaker lost more than $150 billion in value after Musk asked his Twitter followers over the weekend if he should sell 10% of his Tesla stake https://www.reuters.com/business/autos-transportation/tesla-selloff-puts-risk-its-1-trillion-club-membership-2021-11-10 to pay new taxes being discussed by Congress. Nearly 58% said he should.

On Wednesday, Tesla disclosed that Musk had offloaded https://www.reuters.com/business/autos-transportation/what-happened-with-musks-tesla-stock-sales-2021-11-11 3% of his stock in recent days. A sixth of those shares were sold via a corporate “trading plan” – a legal agreement that allows insiders to trade in the company’s shares at a pre-determined date – to satisfy tax obligations. The plan, adopted Sept. 14, pre-dated Musk’s poll.

Musk sold another smaller block of shares on Friday.

The filings did not say why Musk had sold that latest block or the previous 2.5%, and as of Friday it was unclear if the sales related to Musk’s Twitter poll https://www.reuters.com/business/finance/how-tweets-by-teslas-elon-musk-have-moved-markets-2021-11-08.

Spokespeople for the SEC and Tesla did not provide comment.

The episode has again raised questions as to whether the celebrity billionaire breached any rules or the settlement he agreed with the U.S. Securities and Exchange Commission (SEC) for tweeting in 2018 that he had secured funding to take Tesla private when in fact he had not.

Here are five questions Tesla-watchers are asking:

DID MUSK BREACH HIS 2018 SEC SETTLEMENT?

We don’t know. That settlement, which the SEC tightened up in 2019, requires Musk to check any Tweets material to Tesla investors with a company lawyer, but Tesla and the SEC have not said whether that happened. Given Musk’s Tweet appeared to tank the stock, he would be in breach of the settlement had he failed to vet it, said lawyers.

WHAT’S THE DEAL WITH THE TRADING PLAN SALES?

The “Rule 10b5-1” trading plans allow insiders to execute trades in the company’s stock on a pre-determined future date, providing legal protection against potential allegations of insider trading on material non-public information.

It’s common for corporate insiders to pre-plan trades, although they can trade without the plan too. As such, Musk’s sales via the plan are not unusual.

However, the plans themselves have more holes than a Swiss cheese, a problem SEC chair Gary Gensler has pledged…