Reddit Faces FTC Investigation Concerning AI Data-Licensing Ahead of Its IPO

Published March 15, 2024

In a recent turn of events, Reddit, the widely recognized social platform, disclosed that the Federal Trade Commission (FTC) is scrutinizing their methods of licensing user data for artificial intelligence training. This news surfaced on Friday through the latest update to the company's IPO prospectus. With potential impacts on the upcoming IPO, Reddit is under the microscope just as it seeks to enter the stock market.

FTC Inquiry into Reddit's AI Data Practices

On March 14, Reddit received official correspondence from the FTC signaling an investigation into the company's practices surrounding the sale, licensing, or sharing of user-generated content with third parties. The focus of this inquiry lies particularly on the utilization of such data for training AI systems. This announcement was made public via the company's updated prospectus for its initial public offering (IPO).

While Reddit primarily generates revenue through online advertising, it is exploring additional revenue streams, including the early phases of data licensing. The company asserts that these new business opportunities align with Reddit's core values and the rights of its user base.

Reddit's IPO Ambitions Amid Tech Market Lull

At 19 years old, Reddit is courting the public equities market at a time when the tech IPO landscape has been notably quiet. The platform seeks a public valuation close to $6.5 billion, with share prices anticipated to be between $31 and $34. Despite a predominantly dry spell in the tech IPO arena, Reddit is advancing with its plans which were initiated back in February. The company aims to list on the New York Stock Exchange using the ticker symbol 'RDDT.'

Reddit's trajectory in the past year saw a 20% increase in revenue, amounting to $804 million, the bulk of which, about 98%, came from its advertising efforts. The small remaining percentage includes revenue from data licensing endeavors.

However, these practices might position Reddit in the crosshairs of complex and evolving data privacy regulations. The implications of such regulations, as reported in the filing, could potentially unravel complicated legal issues related to data protection and intellectual property laws.

Details of Reddit's Data Licensing

The platform entered into significant data licensing arrangements in January, pegged at $203 million, spanning a two to three year period. From these deals, the company anticipates recognizing upwards of $66.4 million in the year 2024 alone. The data acquired by these third parties, according to Reddit, holds the potential to substantially contribute to the advancement of large-scale AI models.

Google, for example, announced an expanded partnership with Reddit in the same week the IPO was filed, aiming to leverage Reddit’s data for enhancing its AI models.

Reddit is taking the FTC's interest in stride, viewing it as an expected development given the innovative technologies and commercial agreements involved. The company has stated it does not believe any of its data-licensing deals constitute unfair or deceptive trade practices. The FTC, having voiced the intent to gather further information from Reddit, indicates a probe that could extend for an indefinite duration, potentially affecting the company's operations and financial standing.

The process with the FTC and potential implications remain uncertain; however, Reddit is bracing for any requirements to adjust its policies or practices and acknowledges the chance of considerable financial costs and possible operational disruptions as a result of this regulatory scrutiny.

Reddit, FTC, IPO