Introduction

Having already identified so-called “greenwashing” as a significant risk to the integrity of capital markets, global regulators, including our own Australian Securities and Investments Commission (ASIC), have begun to turn their minds to the proliferation of Artificial Intelligence (AI)-related claims in fundraising and similar documents. 

In an era driven by technological innovation, AI has become a focal point in the financial and wider industries. With the proliferation of AI-based products and services, many companies are considering raising capital from retail investors through prospectuses or offer documents. However, in its most recent Corporate Finance Update, ASIC has issued crucial guidance on AI disclosures, emphasising the need for clarity and accuracy.

In this article, we briefly summarise ASIC's statements and provide practical recommendations for companies to mitigate regulatory risks when issuing fundraising documents.

The Importance of AI Disclosure

ASIC recognizes the significance of AI technology in contemporary business operations. As such, it expects issuers whose core business revolves around AI or who use AI extensively to provide comprehensive and transparent information in their fundraising documents.

Key areas of disclosure include:

1. Development and Functionality: Issuers must elucidate how their AI technology was developed, its practical functionality, and how it distinguishes itself from existing market technologies. Providing clear insights into the AI's mechanics and its unique selling points is essential.
2. Dependencies and Commercialisation: Any dependencies that must be met before the AI technology can be commercialised should be disclosed. This encompasses regulatory approvals and the strategy for commercial deployment and scaling to meet market demand.
3. Inherent Risks: Companies should outline the inherent risks associated with their use of AI. These might include biases or inaccuracies in results and potential legal liabilities arising from incorrect outputs.

Overemphasis and Misleading Claims

ASIC explicitly warns against overemphasising the value of AI in fundraising documents. If AI is not a central part of the company's current operations, making exaggerated claims can be problematic. ASIC is committed to scrutinizing claims related to AI and will use its regulatory powers if it suspects misleading statements in offer documents.

Practical Ways to Mitigate Regulatory Risks

To navigate the complexities of AI disclosure and minimize the risk of regulatory action by ASIC, companies should consider the following practical measures:

1. Thorough Due Diligence: Conduct comprehensive due diligence to accurately understand the AI technology's development, functionality, and risks.
2. Clear and Transparent Documentation: Ensure that fundraising documents provide clear, concise, and accurate information about AI technology. Use plain language to make the content accessible to retail investors.
3. Consult Legal Experts: Seek legal counsel with expertise in AI and securities law to review and guide the disclosure process.
4. Risk Mitigation Strategies: Develop strategies to mitigate AI-related risks, such as implementing bias-checking algorithms and ensuring compliance with regulatory approvals.
5. Continuous Monitoring: Regularly monitor and update AI-related disclosures to reflect changes in technology or business operations.

Conclusion

The growing interest in AI-based products and services presents both opportunities and challenges for companies seeking capital from retail investors. By heeding ASIC's guidance and adopting practical measures, companies can ensure their fundraising documents meet regulatory standards.

Clear and accurate AI disclosures not only enhance investor confidence but also safeguard against the risk of regulatory enforcement actions, ensuring a robust and compliant fundraising process.