Reddit discloses FTC investigation regarding its data licensing practices for AI training amidst preparations for IPO, emphasizing confidence in compliance while acknowledging regulatory challenges.
Social media titan Reddit has disclosed that it is currently being scrutinized by the Federal Trade Commission (FTC) concerning its practices of licensing data for training artificial intelligence. This revelation coincides with the company's preparation for its highly anticipated initial public offering.
The disclosure was made in a revised S-1 registration statement submitted to the Securities and Exchange Commission yesterday, following the reception of the FTC inquiry the previous day.
"On March 14, 2024, we received correspondence from the FTC informing us of the commencement of a non-public inquiry focusing on our practices regarding the sale, licensing, or sharing of user-generated content with third parties for the purpose of AI model training," Reddit stated in the filing. “Given the innovative nature of these technologies and commercial agreements, it is understandable that the FTC has shown interest in this area.
“We maintain the belief that we have not participated in any unfair or deceptive trade practices,” the filing asserts.
The FTC investigation follows Reddit's striking $60 million per annum deal with Google in February, granting the tech giant access to Reddit's extensive user data for the training of its AI models. This agreement further solidifies the relationship between the two entities, with Reddit gaining increased visibility on Google's platform in exchange for its invaluable data.
"Through the Reddit Data API, Google will now enjoy efficient and structured access to real-time information," Google stated upon announcing the deal. "Additionally, this will provide us with enhanced insights to better comprehend Reddit content and utilize it in the most accurate and pertinent manner."
Reddit, home to over 100,000 active communities and boasting 1.2 million posts and 7.5 million comments daily, regards its data as a pivotal asset in the swiftly expanding AI market. "We perceive our expanding platform data as a crucial component in training leading large language models (LLMs) and as an additional avenue for monetization for Reddit," the company affirmed in its prospectus.
However, the practice of licensing user data for AI has raised concerns among privacy advocates and regulators. Reddit acknowledged in its filing that its data licensing endeavors are still in their infancy and are subject to evolving regulations.
"These initiatives may expose us to evolving regulatory approaches concerning this data and implicate intricate and evolving laws, regulations, and rules pertaining to data privacy, data protection, misappropriation, and intellectual property," the company stated.
This is not the first instance where Reddit's AI aspirations have garnered attention. As part of its IPO preparations, the company disclosed its investments in Bitcoin and Ethereum as part of its balance sheet strategy. The filing also unveiled Reddit's acquisitions of Ethereum and Polygon (MATIC) to facilitate transactions for virtual goods on its platform.
"We allocated a portion of our surplus cash reserves into Bitcoin and Ether and procured Ether and Matic as a means of payment for the sale of certain virtual goods, a practice we may continue in the future," the company stated.
Reddit's venture into the realms of AI and cryptocurrency aligns with its endeavor to tap into the burgeoning market for these technologies. Citing projections from the International Data Corporation, Reddit highlighted that the global AI market, even excluding China and Russia, is anticipated to reach $1 trillion by 2027, with a compound annual growth rate of 20%.
Nevertheless, the FTC investigation underscores the regulatory hurdles Reddit must navigate as it seeks to capitalize on the AI surge. Despite the company's confidence in its compliance with the law, Reddit acknowledged that the inquiry could be protracted and unpredictable.
"Any regulatory involvement may result in significant expenses, and there is a possibility that such involvement could lead to reputational damage or fines, necessitate alterations or discontinuation of our products, services, features, or functionalities, require adjustments to our policies or practices, divert management and other resources from our core business, or otherwise have adverse effects on our business, financial performance, and prospects," Reddit cautioned in its filing.