This article was originally published by Law360 Canada, part of LexisNexis Canada Inc.
With increasing focus by the regulatory authorities on AI washing contained in CD documents, issuers will need to ensure that their disclosure is balanced and verifiable. In the United Kingdom, rules and laws covering AI washing are already in place, including the Advertising Standards Authority’s code of conduct, which states that marketing communications must not materially mislead, or be likely to do so. Earlier this year, the United States Securities and Exchange Commission fined Toronto-based investment advisor Delphia (USA) Inc. and Global Predictions Inc. a total of US$400,000 in civil penalties related to misleading statements around their use of AI. In Canada, the Canadian Securities Administrators (CSA) have also issued guidance on the topic.
On Nov. 7, 2024, the CSA released CSA Staff Notice 51-365 Continuous Disclosure Review Program Activities for the fiscal years ended March 31, 2024, and March 31, 2023 (51-365). Notice 51-365 notes that the CSA have seen promotional activities by certain issuers leading to disclosure that is either untrue or unbalanced including disclosure and promotional campaigns that provide unbalanced or unsubstantiated material claims about the issuer’s business. Recently, the CSA have noted that such promotional activities have included AI washing.
AI washing is when an issuer makes false, misleading or exaggerated claims about its use of AI systems in its products or services to capitalize on the growing use of and investor interest in AI systems. For example, a 2019 study by tech investment firm, MMC Ventures found that 40 per cent of new tech firms that described themselves as “AI startups” in fact used virtually no AI at all. In 51-365, the CSA identified AI washing in CD documents and in prospectus filings. When describing current and proposed products, services or activities, issuers must not make false, misleading and exaggerated claims about their use of AI systems. It is important to ensure that all public disclosures, whether voluntary or required are factual and balanced.
The CSA identified the following examples which were included in the issuer’s CD record:
- The company utilizes the most advanced AI technology.
- The company’s warehouse houses the most sophisticated AI robotics.
- The company uses AI to solve world issues.
- The company’s use of AI modernizes the company’s business processes and will disrupt the industry in which it operates.
- The company’s business operates in a leading global artificial intelligence domain.
- The company in its public filings only discussed its acquisition and development of AI technology and it appears to be the only business of the issuer.
First, in the above examples, the CSA note the issuer made unsubstantiated claims regarding the capabilities of its technologies. When statements are not supported by facts and corporate activities, they are misleading and promotional, thus inappropriate.
Second, the CSA note the issuer described itself as being a global leader and disruptor despite having generated only nominal revenue from its operating activities. Making broad statements without supportable financial statement performance measures and additional detail regarding the particular aspects of its business or how the capabilities of the business will be measured and evaluated is misleading and promotional.
Third, the CSA note the company’s CD record focuses entirely on AI technology; however, on review, substantially all of the company’s revenue came from the sale of general appliances. Without operating segment disclosure and relevant MD&A (management discussion and analysis), this is misleading because an investor reading the company’s CD record would reasonably assume all of the company’s revenue is from its AI activity.
The CSA have made it clear to issuers that striking the right balance between showcasing AI innovation and maintaining accurate, honest disclosures is more critical than ever for building investor trust and safeguarding market integrity.
The foregoing is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, please contact the author who would be pleased to discuss the issues above with you, in the context of your particular circumstances.
This article was originally published by Law360 Canada, part of LexisNexis Canada Inc.
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