In an interesting development in the week leading up to the 2025 inauguration of President Donald Trump, the U.S. Securities and Exchange Commission (“SEC”) announced a legal action against Elon Musk. In its complaint filed with the U.S. District Court for the District of Columbia (the “Court”) on January 14, 2025 (the “Complaint”), the SEC alleges Musk failed to timely file a Schedule 13D after acquiring over five percent of the outstanding shares of common stock (the “Shares”) of Twitter, Inc. (the “Company” or “Twitter”). The late filing resulted in a violation of Section 13(d)(1) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 13d-1(a) thereunder, both of which impose strict liability for such reporting failures. The SEC is seeking permanent injunctive relief, disgorgement of any ill-gotten gains, prejudgment interest, and civil penalties.
Background: Facts as Set Forth in the SEC’s Complaint
Musk executed numerous purchases of the Company’s Shares during the first quarter of 2022, resulting in his beneficial ownership of over nine percent of the Company’s Shares by early April.[1] Around January 31, 2022, Musk began acquiring substantial blocks of the Shares in a series of transactions while keeping his ownership stake below five percent. The SEC alleges Musk executed the purchases in a manner that would minimize any increase in the Share price that would likely spike following disclosure of his position in the Company. According to the SEC, at some point in February 2022, the broker executing the transactions advised Musk to seek legal counsel regarding his filing and disclosure obligations once he surpassed the five percent threshold. The SEC determined Musk did not seek legal advice during his acquisition spree.
The Complaint alleges that on March 14, 2022, Musk purchased approximately 2.8 million additional Shares, and as of the close of trading, Musk beneficially owned more than five percent of the Company’s Shares, which triggered a Section 13(d) beneficial ownership reporting requirement, specifically a Schedule 13D (or Schedule 13G if eligible to report on such form) within ten calendar days (no later than March 24, 2022). Between March 14 and March 24, 2022, Musk continued to acquire Shares without submitting any ownership filings to the SEC. By the close of trading on March 24, 2022, he beneficially owned over seven percent of the Company’s Shares. By March 25, 2022, Musk’s beneficial ownership of the Company increased to almost eight percent. On March 27, 2022, Musk revealed privately to a member of the Company’s Board of Directors (the “Board”) that he owned at least seven percent of the Company’s Shares. During this exchange, the member of the Board suggested that Musk consider joining the Company’s Board, and they also discussed the possibility of taking the Company private. Over the next two days, Musk acquired an additional 5.5 million Shares. By April 1, 2022, Musk beneficially owned over nine percent of the Company’s Shares. On April 3, 2022, Musk allegedly accepted an offer to join the Board.
Finally, on April 4, 2022 – eleven days after the filing deadline of March 24, 2022 – Musk filed a beneficial ownership report on Schedule 13G with the SEC, publicly disclosing for the first time that he owned over nine percent of the Company’s Shares. On the Schedule 13G cover page, Musk signaled that he neither acquired nor held the Shares with the purpose or effect of changing or influencing the control of the Company by representing – albeit by checking a box – that the filing was made pursuant to Rule 13d-1(c). After the Schedule 13G was filed, the price of the Shares jumped by approximately 27%, closing at $49.97 per share. The next day, April 5, 2022, Musk officially disclosed, among other details, his acceptance of a position on the Company’s Board and his beneficial ownership of over nine percent in a Schedule 13D filing. According to the SEC, Musk’s failure to file a beneficial ownership report to publicly disclose his holdings enabled him to acquire Shares between March 25 and April 1, 2022, at a much lower cost than if he had disclosed his stake by March 24, 2022 (the filing deadline). The SEC claims Musk would have had to pay at least $150 million more to acquire the same number of Shares between March 25 and April 1, 2022. Moreover, according to the SEC, investors who sold Shares unaware that Musk had accumulated more than five percent of the Company’s Shares suffered substantial economic harm by selling at artificially low prices because the market had not yet priced in this material information.
Beneficial Ownership Reporting Rules
As part of the Williams Act of 1968, Congress enacted Section 13(d) to provide investors and the market with information about accumulations of certain classes of equity securities of a company by persons who have the potential to change or influence control of that company. At the time of Musk’s alleged violation in 2022, Section 13(d)(1) and Rule 13d-1(a) thereunder required any person who acquired beneficial ownership of more than five percent of any voting class of equity securities registered under Section 12 of the Exchange Act to file a Schedule 13D with the SEC within ten calendar days after crossing the five percent threshold.[2] Rule 13d-1(c) permits a person to file a short-form statement on Schedule 13G, in lieu of Schedule 13D otherwise required, by the same deadline if the person has not acquired the securities with a disqualifying purpose or effect and beneficially owns less than 20% of the class of securities (“Passive Investors”). Prior to the amendments to the beneficial ownership reporting rules adopted by the SEC in 2023 – and at the time of Musk’s alleged violation – Passive Investors were required to file Schedule 13G within ten calendar days after crossing the five percent threshold.[3]
Musk’s Alleged Violation of Section 13(d)(1) and Corresponding Rule 13d-1(a)
Musk’s initial Schedule 13G filed on April 4, 2022 was made twenty-one days after crossing the five percent threshold and eleven days after the filing deadline of March 24, 2022. Not only was the Schedule 13G filed after the deadline applicable to beneficial owners seeking to rely on Rule 13d-1(c), but Musk also failed to certify, as required under Item 10 of Schedule 13G, that he did not acquire or hold the Shares for the purpose of or with the effect of changing or influencing control of the Company.
On April 4, 2022, the SEC sent a comment letter to Musk requesting additional information with respect to his initial Schedule 13G, which inquired as to the reason for his failure to certify that he did not have a disqualifying purpose or effect with respect to his acquisition of the Shares. In addition, the letter requested that Musk provide the SEC with a brief analysis detailing the bases upon which he was eligible to rely upon Rule 13d-1(c) to report on Schedule 13G. Interestingly, the letter asked Musk to “address, among other things, [his] recent public statements on the Twitter platform regarding Twitter,” including statements questioning whether the Company “rigorously adheres” to free speech principles. It appears the Staff’s comment letter went unanswered based on the lack of any response letter publicly available on the SEC’s website.
Given that the Complaint focused solely on alleged violations of Section 13(d) and Rule 13d-1, and not Section 13(g), it is possible the SEC may have viewed Musk as ineligible to file on Schedule 13G in the first place. A Schedule 13G may be filed in lieu of Schedule 13D when certain eligibility criteria are met (e.g., Passive Investors). Here, Musk’s public comments and actions at the time, his communications with the Company regarding a possible board seat, his decision to join Twitter’s Board, and his ultimate acquisition of the Company all likely served as strong indicia that Schedule 13G was not available. If true, Musk was left with a default reporting obligation on Schedule 13D, due within ten calendar days of crossing the five percent threshold. In this case the agency chose to focus on the late 13D filing, relying on the objective timeliness of the filing. Pursuing a case under Section 13(g) would necessarily have involved a determination of Musk’s subjective mind-set, whether he had a control purpose at certain points in time, and the overall purpose or effect of his rapid accumulation of Shares. No doubt a more challenging burden, one the SEC chose not to pursue. Either way, Musk was late, and the SEC chose to bring action on the failure to timely report.
Potential Liability for Failure to File Beneficial Ownership Reports
The SEC has requested that the Court issue a final judgment permanently enjoining Musk from violating Section 13(d) and Rule 13d-1 and order Musk to pay disgorgement of his unjust enrichment resulting from the violation as well as a civil penalty. Although sanctions for late, deficient, or missing Schedule 13D or 13G filings often range from $10,000 to $200,000 depending on the scope and number of violations involved, the SEC can seek, and has sought in the past, substantially higher penalties, especially when the non-compliance arises in the change of control context.[4] In light of the apparent unjust enrichment of $150 million achieved during a rapid acquisition of Shares, followed by Musk joining the Company’s Board and his ultimate acquisition of Twitter, the case itself is not surprising. Only the timing of the Complaint – filed two years later and just days before a change in the Presidential Administration – is somewhat unusual.
Conclusion
Regardless of when the action was brought, or the actual outcome of the case, this action underscores the importance of timely reporting of beneficial ownership, especially in a change of control context. The proceedings will no doubt be closely followed by market participants and legal practitioners. We will provide periodic updates on this prominent SEC enforcement action as the matter plays out.
Special thanks to corporate associates, Matt Staugaard in our Orange County office and Yama Keshawerz in our Denver office, for their assistance in the preparation of this post.
[1] In 2023, Twitter, Inc. merged into X Corp., a wholly owned subsidiary of X Holdings Corp., a privately held company.
[2] In 2023, the SEC adopted amendments to certain rules governing beneficial ownership reporting, which generally shortened the filing deadlines for initial and amended beneficial ownership reports filed on Schedules 13D and 13G, including an amendment to Rule 13d-1(c) to shorten the deadline for Passive Investors to file an initial Schedule 13G in lieu of Schedule 13D to within five business days after the date on which they acquire beneficial ownership of more than five percent of a covered class of securities. See SEC Release Nos. 33-11253; 34-98704 (Oct. 10, 2023).
[3] See SEC Release No. 34-39538 (Jan. 12, 1998).
[4] Although sanctions generally range from $10,000 to $200,000, in 2024 the SEC fined an investment advisory firm $950,000 for its failure to timely convert from Schedule 13G to Schedule 13D upon forming a “control” purpose. See Gibson Dunn Securities Regulation and Corporate Governance Monitor (March 6, 2024).