FTC investigation into Reddit’s pre-IPO AI data licensing practices

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

“On March 14, 2024, we received a letter from the FTC notifying us that FTC officials are conducting a non-public investigation focused on our sale, licensing, or sharing of user-generated content with third parties to train AI models,” Reddit said in updated initial public offering prospectus. Reddit filed for an IPO in February and plans to trade on the New York Stock Exchange under the symbol “RDDT.”

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

Reddit said “the possibility 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 nearly $6.5 billion. Reddit is trying to go public during a historically slow period for tech IPOs. Since then, there hasn’t been a notable venture-backed tech debut Instacart and Clavio in September. The market was previously largely shut down from late 2021.

Reddit’s revenue grew 20% last year to $804 million. About 98% of sales come from advertising. The remaining 2% includes data licensing.

“These programs may subject us to evolving approaches to the regulation of this data and involve complex and evolving laws, rules and regulations on data privacy and data protection, misappropriation and intellectual property,” Reddit said in the updated filing.

An FTC spokesman declined to comment.

Reddit said it struck 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 an IPO, Google announced an expanded partnership with the company that gives the search giant access to data to train its AI models, among other applications.

“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.

Reddit said it was “not a surprise that the Federal Trade Commission has expressed interest” in the matter, given the “novel nature of these technologies and trade arrangements.”

“We do not believe we have engaged in an unfair or deceptive business practice,” Reddit said. “The letter states that FTC officials are interested in meeting with us to learn more about our plans and that the FTC intends to request information and documents from us as the investigation continues.”

Reddit noted that any dealings with regulators could be “protracted and unpredictable” and could result in “significant costs” and other research and product changes that could “require us to change our policies or practices, divert management and other resources from our business, or would otherwise adversely affect our business, results of operations, financial condition and prospects.”

Reddit’s data licensing business was at the center of a widespread outcry 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 building applications.

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