Reddit Discloses FTC Probe into AI Data Licensing Ahead of IPO

Social media giant Reddit has revealed that it is under investigation by the Federal Trade Commission (FTC) over its data licensing practices for artificial intelligence training. The disclosure comes as the company prepares for its long-awaited initial public offering.

The disclosure appeared in an amended S-1 registration statement filed with the Securities and Exchange Commission yesterday, submitted the day after the FTC inquiry was received.

“On March 14, 2024, we received a letter from the FTC advising us that the FTC’s staff is conducting a non-public inquiry focused on our sale, licensing, or sharing of user-generated content with third parties to train AI models,” Reddit stated in the filing. “Given the novel nature of these technologies and commercial arrangements, we are not surprised that the FTC has expressed interest in this area.

“We do not believe that we have engaged in any unfair or deceptive trade practice,” the filing notes.

The FTC probe follows a $60 million per year deal Reddit signed with Google in February, granting the search giant access to Reddit’s vast trove of user data to train its AI models. The agreement deepens the relationship between the two companies, with Reddit gaining greater visibility on Google’s platform in exchange for its valuable data.

“With the Reddit Data API, Google will now have efficient and structured access to fresher information,” Google said at the time of the announcement. “As well as enhanced signals that will help us better understand Reddit content and display, train on, and otherwise use it in the most accurate and relevant ways.”

Reddit, which boasts over 100,000 active communities and averages 1.2 million posts and 7.5 million comments daily, sees its data as a key asset in the rapidly growing AI market. “We believe our growing platform data will be a key element in the training of leading large language models (“LLMs”) and serve as an additional monetization channel for Reddit,” the company stated in its prospectus.

However, the licensing of user data for AI has raised concerns among privacy advocates and regulators. In its filing, Reddit acknowledged that its data licensing efforts are still in the early stages and subject to evolving regulations.

“These programs may subject us to evolving approaches to the regulation of this data and implicates complex and developing data privacy and data protection, misappropriation, and intellectual property laws, rules, and regulations,” the company said.

This is not the first time Reddit’s AI ambitions have made headlines. As part of its IPO plans, the company said that it had invested in Bitcoin and Ethereum as part of its balance sheet strategy ahead of its IPO. The filing also revealed that Reddit had acquired Ethereum and Polygon (MATIC) to pay for virtual goods on its platform.

“We invested some of our excess cash reserves in Bitcoin and Ether and also acquired Ether and Matic as a form of payment for sales of certain virtual goods, which we may continue to do in the future,” the company said.

Reddit’s foray into the world of AI and cryptocurrency comes as the company seeks to tap into the growing market for these technologies. Citing estimates from International Data Corporation, Reddit noted that the global AI market—even without China and Russia—is expected to reach $1 trillion by 2027, with a compound annual growth rate of 20%.

However, the FTC investigation highlights the regulatory challenges Reddit faces as it looks to capitalize on the AI boom. Despite the company’s confidence that it has not broken any laws, Reddit acknowledged that the inquiry could be lengthy and unpredictable.

“Any regulatory engagement may cause us to incur substantial costs, and it is possible for any regulatory engagement to result in reputational harm or fines, cause us to discontinue or modify our products, services, features, or functionalities, require us to change our policies or practices, divert management and other resources from our business, or otherwise adversely impact our business, results of operations, financial condition, and prospects,” Reddit disclaimed in the filing.