The Bitcoin resurgence that began in 2020 has received a boost from a new mini-trend: publicly held companies accumulating large reserves of the cyptocurrency.
Tesla Inc., leading maker of electric cars, and MicroStrategy Inc. a business intelligence software and services company, have each acquired billions of dollars worth of Bitcoin. Moreover, each company’s founder/CEO has become a headline-generating spokesman for Bitcoin.
An important question hangs over this entertaining business news, however: Do Tesla’s and MicroStrategy’s purchases of large blocks of Bitcoin, and their CEOs’ accompanying crypto-boosting comments, expose them to SEC enforcement or private litigation risks?
At first glance, the risk of SEC enforcement activity does not appear to be significant—but the risk is also not nonexistent. The SEC has previously stated in informal advice that Bitcoin is not a security under the Howey test due to the decentralized nature of the currency. Although the essence of securities law compliance is disclosure and both companies havepublicly disclosed and described their digital currency purchases in SEC filings, the question whether an issuer fully and fairly disclosed the nature of the transactions and the attendant risks to the company arises for all filings. Another risk involves communications outside the filings, which is of particular concern to Tesla given the fondness of Elon Musk for the Twitter spotlight.
MicroStrategy, Tesla, and the SEC
Both MicroStrategy and Tesla — and their CEOs — have been involved in significant SEC enforcement actions. The previous cases remain important, because the CEOs of both companies remain subject to sanctions imposed as a condition of their settlements.
MicroStrategy became a reporting company in June 1998 after an initial public offering and listed its securities on the Nasdaq Stock Exchange. Less than two years later, the SEC brought an administrative action against the company and sued its senior management in federal court, claiming that MicroStrategy materially overstated its revenues and earnings in violation of generally accepted accounting principles. According to the SEC, the company reported positive net income during this two-year period when it should have reported net losses from the time of the IPO forward.
Without admitting or denying the charges, three senior MicroStrategy officers agreed to disgorge a total of approximately $10 million, including a disgorgement order of $8.28 million entered against the company’s CEO and co-founder, Michael Saylor. The officers also consented to the entry of antifraud injunctions, and each agreed to pay $350,000 in civil penalties. The company agreed to abide by a cease-and-desist order and be subjected to significant corporate governance undertakings designed to prevent future reporting violations.
More recently, Elon Musk’s Twitter feed has generated headlines and regulatory interest. In 2018, Musk famously tweeted, “Am…