The Securities and Exchange Commission is inquiring about a tweet from Tesla CEO Elon Musk regarding the potential for the company to go private, The Wall Street Journal and Bloomberg reported this week.

An inquiry from the SEC does not necessarily mean an investigation will follow. But if the agency determines one is necessary, it will start by looking at a tweet Musk posted on Tuesday, Harvey Pitt, a former SEC chairman, told Business Insider.

If Musk were to be found guilty of misconduct, punishments could range from hundreds of millions of dollars in fines to criminal prosecution.

Nearly three days after Tesla CEO Elon Musk said he had secured the funding necessary to take Tesla private pending a shareholder vote, neither he nor the company has disclosed where that money could come from.

One possible explanation: Tesla and its board of directors don't know.

While Tesla's board released a statement on Wednesday saying Musk discussed with it last week the prospect of going private, Musk has yet to tell it where the backing for a buyout deal would come from, Reuters reported on Thursday, citing a source familiar with the matter.

Tesla did not immediately respond to Business Insider's request for comment.

(Have a Tesla news tip? Contact this reporter at mmatousek@businessinsider.com.)

2 words could get Musk into trouble

Musk's failure to clarify his tweets indicating Tesla is a shareholder vote away from becoming a private company is a problem, James Rosener, a partner at the law firm Pepper Hamilton who specializes in private equity and corporate financing, told Business Insider.

"The fact that there has been no announcement clarifying, confirming, or denying the financing is surprising and puts Tesla and Musk at great risk," he said in an email.

That risk includes the possibility of fines from the SEC, or even criminal prosecution.

The Wall Street Journal reported on Wednesday that the SEC had made an inquiry into Tesla about whether one of Musk's tweets regarding the possibility of taking the company private was truthful. And on Thursday, Bloomberg reported that the agency was "intensifying" its inquiry.

An inquiry from the SEC does not necessarily mean an investigation will follow. But if the agency determines one is necessary, it will start by looking at the tweet that has put Musk under intense scrutiny, according to Harvey Pitt, who was the SEC's chairman from 2001 to 2003.

"Am considering taking Tesla private at $420. Funding secured," Musk said on Tuesday via Twitter before issuing a formal statement on Tesla's website.

Tesla's share price surged after the tweet, rising by as much as 12%, to over $381, before trading closed.

According to Pitt, mentioning the possibility of taking Tesla private on Twitter, while ill-advised, will not trouble regulators. Instead, it's the tweet's final two words, "funding secured," that could create problems.

"'Funding secured' is a very strong term, and it has legal consequences," Pitt said.

If the SEC launched an investigation, it would seek to determine whether at the time Musk tweeted he had a legally binding commitment that would provide enough funding to convert Tesla into a private company at $420 a share. The agency would also look at the veracity of the statement Tesla later posted on its website and whether the company should have made additional statements based on what it knew.

The agency would be able to answer those questions relatively quickly, but its second potential area of inquiry — Musk's intent with his tweets — would be more challenging, Pitt said.

The SEC could look at Musk's war against short-sellers

Musk could be punished if the agency finds he tweeted about a buyout not because he had a deal in place, but because he wanted to punish short-sellers — who bet against a company's stock — knowing his statement would be likely to increase the price of Tesla's shares.

Proving that would be a difficult task, in part because Musk had previously expressed his desire to take Tesla private.

"I wish we could be private with Tesla," Musk said in an interview with Rolling Stone published in November. "It actually makes us less efficient to be a public company."

But Musk has been open about his disdain for Tesla short-sellers. On multiple occasions, he has hinted at an event he said would "burn" them.

"Short burn of the century comin soon," he tweeted in May. "The sheer magnitude of short carnage will be unreal."

"They have about three weeks before their short position explodes," he said on June 17.

To determine Musk's intent with his tweets on Tuesday, the SEC would look at his internal communications before and around the time he sent the first tweet, Pitt said. If Musk had expressed to anyone that he wanted to take revenge on short-sellers, or if he was told not to tweet about a potential go-private deal while markets were open, he could be found guilty of market manipulation.

That's a difficult charge to prove, Pitt said. And ultimately, any punishment Musk or Tesla would receive would depend on the amount and strength of evidence the SEC found.

For Musk to be criminally prosecuted and sent to prison, wrongdoing would have to be proved beyond a reasonable doubt. For less severe penalties, the SEC would have to determine it was more likely than not that Musk committed some form of misconduct, Pitt said. If it did, its punishments could range from imposing hundreds of millions of dollars in fines on Musk or Tesla to barring Musk from ever serving as an officer or director of a public company again, according to Pitt.

Whether or not Musk's actions lead to an SEC investigation, his conduct this week has been highly unusual, putting Tesla and its shareholders in an increasingly difficult position.

"This whole course of events is highly problematic," Pitt said.

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