A Guide To Navigating The Complexities Of GenAI In Investment – Corporate and Company Law

In today’s rapidly evolving technological landscape, the
emergence of generative artificial intelligence (GenAI) presents
both opportunities and challenges for investors, founders and
companies alike. With GenAI generating new categories of valuable
information, it is crucial to navigate this terrain thoughtfully
and compliantly, especially considering the regulatory, legal and
social considerations at play.

Bennett Jones recently discussed these considerations as part of
the CVCA’s Invest Canada Webinar Series and are pleased to
offer highlights from the panel. A recording of the webinar is
available on CVCA’s website.

Understanding the Regulatory Landscape

The regulatory environment surrounding AI is evolving. The
federal Canadian Bill C-27 introduces the Artificial
Intelligence and Data Act, which include substantial
compliance obligations and corresponding exposure. A key component
of this draft legislation is the number of players in the AI
‘food chain’ who may be ‘responsible’ for
compliance, which includes those involved in the design,
development, making available for use, using or managing an AI
system. At present, AI is regulated under privacy legislation to
the extent the use of AI involves the collection, use or disclosure
of personal information. Given the wide range of parties who may
have responsibility under AI legislation, due diligence and
thoughtful negotiation of terms will be critical to managing
litigation exposure.

In addition to the Canadian AI legislation, foreign AI
legislation such as the EU AI Act (which is expected to
come into force in advanced of Canadian legislation) will impact
investments in the AI space. The EU AI Act will have
extra-territorial effect, as will the Canadian AI legislation.

On the regulatory front, competition laws such as the
Competition Act could also come into play, as seen with
the Federal Trade Commission’s involvement in the United
States. The draft AI Act includes provisions for information
sharing between AI and competition commissioners, indicating
potential coordination in regulating deceptive trade practices.
Litigation risks, including class action lawsuits, contractual
disputes and fraud/security concerns further underscore the need
for careful navigation of the regulatory landscape.

Dealing with Risks and Challenges

Investors, founders and companies must approach GenAI investment
and adoption carefully, leveraging the expertise of legal and
regulatory experts. Investing upfront in understanding and
addressing potential risks can prevent costly mistakes and
existential threats to organizations. Establishing best practices,
staying informed about regulatory developments and engaging with
industry peers can inform decision making and mitigate risks
effectively.

Integrating ESG Principles

As environmental, social and governance (ESG) principles gain
prominence, evaluating proposed investments involving GenAI
requires a nuanced approach. Ethical and moral considerations
should be codified into firm policies, providing a framework for
navigating regulatory changes and ESG requirements. Bias concerns
inherent in GenAI platforms must be addressed, as biases can impact
ESG targets and lead to misreporting.

The environmental impact of GenAI, including its
energy-intensive nature also warrants consideration. Investors and
companies must assess energy consumption throughout the AI
lifecycle and negotiate access to information and reporting rights
accordingly. Implementing guardrails and safety measures—such
as system designs, terms of use and corporate policies—can
mitigate social risks and protect against reputational damage.

Structuring Investments and M&A Deals

In structuring investments and M&A deals, due diligence is
paramount. Provisions related to data privacy, security policies,
training data access and model development should be negotiated to
mitigate regulatory and reputational risks. Enhanced governance
rights, negative covenants, approval rights and access to training
materials are essential considerations to protect investors and
companies.

Driving Innovation

Navigating the complexities of GenAI in investment requires a
strategic and comprehensive approach. With careful consideration
and proactive measures, GenAI can be leveraged responsibly to drive
innovation and growth in diverse sectors.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.