Reddit Reveals FTC Investigation into AI Data License Before IPO

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

The statement came in an amended S-1 filing with the Securities and Exchange Commission yesterday, which was filed a day after the FTC's request.

“On March 14, 2024, we received a letter from the FTC indicating that FTC staff will conduct a non-public inquiry focused on our sale, license or sharing of User Generated Content to third parties to train AI models.” Reddit said in its filing. “Given the new nature of these technologies and business arrangements, we are not surprised that the FTC is interested in this area.

“We do not believe we are engaged in any unfair or deceptive business practices,” the filing notes.

The FTC probe follows a $60 million-a-year deal Reddit signed with Google in February, which will allow the search giant to use Reddit's vast user data to train AI models. The deal strengthens the relationship between the two companies, with Reddit gaining more visibility on Google's platform for valuable information.

“With the Reddit Data API, Google will now have access to efficient and structured new data,” Google said at the time of the announcement. “Also improved signals that help us better understand and display, train, and otherwise use Reddit content in the most accurate and relevant ways.”

With over 100,000 active communities and an average of 1.2 million posts and 7.5 million comments per day, Reddit sees data as a key resource in the fast-growing AI market. “We believe our growing platform data will be a key component of training to guide large-scale linguistic models (“LMS”) and serve as an additional revenue generation channel for Reddit,” the company said in the prospectus.

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

The company said, “These programs can enable us to manage this information and implement complex and evolving approaches to data privacy and data protection, misuse and intellectual property laws, regulations and guidelines.”

This isn't the first time Reddit's AI ambitions have made headlines. As part of its IPO plans, the company said it has invested in Bitcoin and Ethereum as part of its balance sheet strategy ahead of the IPO. The filing also revealed that Reddit has acquired 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 received Ether and Bitcoin as payment for the sale of certain virtual goods, which we will 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 Global Data Corporation, Reddit notes that the global AI market—not including China and Russia—is expected to reach $1 trillion by 2027, with a compound annual growth rate of 20 percent.

However, the FTC's investigation highlights the regulatory challenges Reddit faces as it tries to capitalize on the AI ​​boom. While the company is confident it hasn't broken any laws, Reddit admits the inquiry can be lengthy and unpredictable.

“Any regulatory involvement could subject us to significant costs, and any regulatory involvement could result in reputational damage or penalties, cause us to discontinue or change our products, services, features or practices, require us to change our policies, or practices, divert management and other resources from our business; or otherwise adversely affect our business, operations, financial condition and prospects,” Reddit denied in the filing.