Social media giant Reddit has revealed that it is being investigated 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 yesterday with the Securities and Exchange Commission, one day after the FTC's request was received.
“On March 14, 2024, we received a letter from the FTC informing us that FTC staff was conducting a non-public investigation focused on our sale, licensing, or distribution of User-Generated Content to third parties, to train AI models.” Reddit stated in the filing. “Given the novelty 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 practices,” the filing states.
The FTC investigation follows a $60 million-a-year deal Reddit signed with Google in February, giving 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 as Reddit gains greater visibility on Google's platform in exchange for its valuable data.
“With the Reddit Data API, Google now has efficient and structured access to more current information,” Google said at the time of the announcement. “As well as improved signals that will help us better understand Reddit content and display, train, and otherwise consume it in the most accurate and relevant way.”
Reddit, which has over 100,000 active communities and an average of 1.2 million posts and 7.5 million comments per day, sees its data as a key factor in the fast-growing AI market. “We believe our growing platform data will be a key element in training leading large language models (“LLMs”) and serve as an additional monetization channel for Reddit,” the company said in its prospectus.
However, licensing 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 expose us to evolving approaches to regulating this data and involve complex and evolving privacy, misappropriation and intellectual property laws, rules and regulations,” the company said.
It's not the first time Reddit's AI ambitions have made headlines. As part of its IPO plans, the company said it invested in Bitcoin and Ethereum as part of its pre-IPO balance sheet strategy. The filing also revealed that Reddit had purchased Ethereum and Polygon (MATIC) to pay for virtual goods on its platform.
“We have invested a portion of our excess cash reserves in Bitcoin and Ether and have also acquired Ether and Matic as payment for the sale 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 looks to tap into the growing market for these technologies. Citing estimates from International Data Corporation, Reddit found that the global AI market – even excluding China and Russia – is expected to reach $1 trillion by 2027, with a compound annual growth rate of 20%.
But the FTC investigation highlights the regulatory challenges Reddit faces if it wants to capitalize on the AI boom. Despite the company's assurance that it did not break any laws, Reddit acknowledged that the investigation could be lengthy and unpredictable.
“Any regulatory intervention may result in us incurring significant costs and it is possible that any regulatory intervention could result in reputational damage or financial penalties, cause us to discontinue or modify our products, services, features or functionality, or that we may policies or practices, divert management and other resources from our business or otherwise have an adverse effect on our business, results of operations, financial condition and prospects,” Reddit countered in the filing.
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