You have probably seen people tweeting and posting words like “GameStop”, “Reddit”, “Wall Street” and “Elon Musk” this past week. This is due to some interesting trading by ‘amateur’ investors giving Wall Street a run for its money. Before getting into the meat of the matter embodied in the title of this piece, here are some quick background facts you should know – if you don’t already:
1. GameStop is an American gaming retailer that sells games, consoles, and other electronics. The company hasn’t been in great shape largely due to the COVID-19 pandemic which reduced traffic at its stores.
2. Reddit, a social media site with forums where people talk about everything and anything, witnessed buzz in its wallstreetbets forum, where users typically discuss shares and where they plan to invest money. Investors, from time to time, bet on stock of companies they don’t expect to do well in the future and borrow shares in these company with a promise to buy them back later (if the company – and the stock – loses value, the investor would make profit). In stock market lingo, this is referred to as “shorting” or “short selling”.
3. A number of hedge funds had ‘bet’ on the fact that GameStop stock would drop significantly. However, droves of users in the Reddit wallstreetbets forum exchanged tips, ‘banded together’, and aggressively bought shares in GameStop. This demand raised GameStop’s share price significantly (at least until Robinhood and other brokerages clamped down on this to restrict purchases of certain shares).
The reactions by investors to the display of his influence indicates that investors are willing to jump at shares simply because of a tweet from Elon
Where does Elon Musk Come In?
Good question. Elon’s influence (particularly on social media) is without a doubt. The world’s wealthiest man has repeatedly shown his ability to move and shake markets (as though manipulating magnetic fields) and he was partly responsible for sending GameStop’s shares into a frenzy after he tweeted “Gamestonk!!”. This one-word tweet seemed more like a “rally the troops” message to the ‘Reddit armies’ from Leonidas, egging them on even further. This isn’t the first time Elon’s tweets have caused chaos in the stock market.
Earlier in January 2021, a Texas-based health care company, Signal Advance, saw its share value go up by over 1,000% during a period after a tweet from Musk saying, “Use Signal.” Although he was actually referring to WhatsApp’s rival messaging platform, Signal (which isn’t a PLC), Signal Advance saw its share value increase exponentially.
Elon’s tweets have also got him into trouble in the past. In 2018, Musk and Tesla were ordered by the United States Securities and Exchange Commission to pay US$20 million each, after a tweet from Elon saying he was considering taking Tesla private at US$420 per share and that they had secured funding. The tweet had no basis in fact and, according to the US SEC, adversely affected investors. Tesla’s stock has however surged significantly since then, even during the COVID-19 pandemic, like a dark phoenix after the apocalypse.
The reactions by investors to the display of his influence indicates that investors are willing to jump at shares simply because of a tweet from Elon. This poses a risk to the stock market, which experts say may be in a bubble right now, coming off the back of the COVID-19 pandemic.
Questions from a Nigerian Law Perspective?
The events that have occurred over the past week have got a lot of people asking a similar question: “Do Elon Musk’s tweets amount to market manipulation?” From a Nigerian law perspective, the SEC Rules, 2013 (as amended) govern the utterance or presentation of untrue statements of material fact and the omission to disclose a material fact by persons trading in securities. The said rules also govern dealing in the securities of a company of which a person is an insider. Furthermore, the Investments and Securities Act No. 29 of 2007 (as amended) (“ISA”) provides in Section 106 (1) that:
“A person shall not effect, take part in, be concerned with or carry out, either directly or indirectly, two or more transactions in securities of a body corporate being transactions which have, or are likely to have the effect of raising or lowering the price of securities of the body corporate on a securities exchange or capital trade point with intent to induce other persons to purchase, sell or subscribe for securities of the body corporate or of a related body corporate.”
Section 106 (3) provides that a reference in Section 106 to a transaction in relation to securities of a body corporate include: (a) a reference to the making of an offer to subscribe, sell or purchase such securities of the body corporate; and (b) a reference to the making of an invitation however made which expressly or impliedly invites a person to offer to subscribe, sell or purchase such securities of the body corporate. Any person who contravenes these provisions shall be liable to a penalty of N500,000 in addition to a nullification of the said transaction.
Tweets like “Gamestonk!!” or “Use Signal” on their own, cannot be reasonably deemed to violate these provisions.
Furthermore, Section 107 of the ISA provides that no person shall knowingly, recklessly or negligently make a statement, or disseminate information, which is false or misleading in any material particular and likely to induce the sale or purchase of the securities by other persons or likely to have the effect of raising, lowering, maintaining or establishing the market price of securities.
The tweets referred to above cannot be reasonably interpreted as being false or misleading (they don’t actually say anything) albeit being capable of inducing the sale or purchase of securities by others, due to the influence of the utterer in question. Thus, if a situation that falls on all fours with the above case-studies occurs in Nigeria, same will not amount to manipulation under Nigerian law.
What Next?
Do issues like tweets from highly influential people call for a review of our laws to regulate such acts, and thereby protect the investing public who may be very active on social media but not be skilled investors? A huge number of Nigerian social media users are not sophisticated investors and act largely based on trends. Users on Twitter, for example, are mostly involved in endless scrolling on their timeline or taking part in a new #challenge. What do these patterns mean for the global and Nigerian stock market?
Toni is an Associate in the Corporate, Securities and Finance department at Banwo & Ighodalo, a tier-1 law firm in Nigeria. The information provided herein does not and is not intended to, constitute legal advice. The contents of this paper are for general informational purposes only. Formally engage a lawyer in the relevant jurisdiction before acting on any information contained herein.
