Since the release of ChatGPT 3.5 in November 2022, public interest in artificial intelligence (AI) has surged in a classic example of a hype cycle. As with past technological breakthroughs, companies may be tempted to overstate their AI capabilities to draw investor attention.

But that may be coming to a swift end as the U.S. Securities and Exchange Commission (SEC) has begun paying close attention to this “AI Washing” trend and warning organizations against overstatement.[1]

What is AI Washing?

“AI Washing” is the intentional overstating of a product or service’s AI capabilities to make such product or service appear more innovative or intelligent than it actually is, thus “artificially” inflating sales or engagement. The phrase stems from “greenwashing,” frequently used to describe companies that exaggerate their efforts to reduce environmental impact.

Regulators have been warning about the risks of AI Washing for some time. SEC Chair Gary Gensler, while speaking at an AI conference in December 2023, cautioned: “Don’t do it…. One shouldn’t greenwash, and one shouldn’t AI wash.” He reiterated these sentiments in February 2024, emphasizing the need for truthfulness in AI disclosures.

If you are rushing to make claims about using AI in your investment processes to capitalize on growing investor interest, stop. Take a step back, and ask yourselves: do these representations accurately reflect what we are doing or are they simply aspirational?

Yet, the impact of AI on our lives will continue to expand, and how AI is disclosed and discussed by companies will evolve alongside the associated risks. Mark Zuckerberg noted that AI is going to affect almost every company’s products, highlighting the pressure on CEOs to keep up with the AI trend.

Recent SEC Enforcement Actions

On March 18, 2024, the SEC announced its first settled charges against two investment advisers for violating antifraud provisions through misrepresentations about their use of AI. Both companies claimed to utilize certain AI technologies to attract investors but did not actually use those capabilities.

Delphia claimed to use AI and machine learning to analyze client data for investment decisions, but the SEC found these claims false and misleading.

Similarly, Global Predictions made misleading statements about its AI expertise as the “first regulated AI financial advisor.” Both companies settled violations of the Advisers Act and paid civil penalties.

On June 11, 2024, the SEC announced charges against the CEO of a now-closed AI recruitment startup for alleged fraud using buzzwords like “artificial intelligence.” The CEO allegedly defrauded investors of at least US$21 million.

Key Takeaways

The SEC is taking AI Washing seriously, and companies should ensure compliance with its protocols. Here are some recommendations:

• Fully disclose your AI usage and avoid vague claims.
• Be specific about the nature and extent of your AI technologies.
• Understand how your key service providers use AI.
• Provide details about your AI implementations and their impact.
• Establish an AI governance framework.
• Train marketing teams to accurately label technologies as AI.
• Review all public statements about AI with your legal team.
• Monitor your company’s use of AI technologies.
• Regularly update stakeholders on AI initiatives.

Special thanks to Natalie Smith for her contributions to this article.

[1] Companies also face the threat of private securities class actions related to AI-related deceptions.