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FTC conducting inquiry into Reddit's AI data-licensing practices ahead of IPO

2 months ago 106

Mateusz Slodkowsk | Lightrocket | Getty Images


Reddit said on Friday that the Federal Trade Commission sent a letter to the company about its data-licensing business related to the training of artificial intelligence systems.

"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 said in an updated initial public offering prospectus. Reddit filed for an IPO in February, and plans to trade on the New York Stock Exchange under the ticker symbol "RDDT."

Although Reddit's core business relies on online advertising, the company is seeking to make money in other ways, and is in the "early stages" of its "data licensing efforts," the filing said.

Reddit said, "the opportunity does not conflict with our values and the rights of our Redditors," referring to its users and forum moderators.

The 19-year-old company has filed to sell shares in its IPO at $31 to $34 each in an offering that would value the business at close to $6.5 billion. Reddit is trying to hit the public market during a historically slow period for tech IPOs. There hasn't been a notable venture-backed tech debut since Instacart and Klaviyo in September. Before that, the market had been largely shuttered since late 2021.

Reddit's revenue rose 20% last year to $804 million. About 98% of its sales came from advertising. The remaining 2% includes data licensing.

"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," Reddit said in the updated filing.

An FTC spokesperson declined to comment.

Reddit said it entered into some data-licensing deals in January with a total contract value of $203 million over two to three years. It expects to recognize at least $66.4 million from these agreements in 2024.

The same week that Reddit filed for its IPO, Google announced an expanded partnership with the company, giving the search giant access to data to train its AI models, among other uses.

"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 said in its prospectus.

Reddit said it's "not surprised that the FTC has expressed interest" in the matter, considering "the novel nature of these technologies and commercial arrangements."

"We do not believe that we have engaged in any unfair or deceptive trade practice," Reddit said. "The letter indicated that the FTC staff was interested in meeting with us to learn more about our plans and that the FTC intended to request information and documents from us as its inquiry continues."

Reddit noted that any dealings with regulators could be "lengthy and unpredictable" and could result in "substantial costs" and other probes and product changes that could "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's data-licensing business was at the center of a widespread protest from Reddit moderators, who were upset over the summer when the company announced a pricing change affecting some third-party developers using its application programming interface, or API, to build apps.

The company said at the time that the API price hike was necessary to ensure it was adequately compensated by tech companies such as Google and OpenAI, which siphon massive amounts of Reddit data to help train and improve the capabilities of their AI models. But several developers complained that the API update proved too costly for them to continue operating their Reddit apps, which some Redditors used to help them moderate discussions.

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