AI and Corporate Securities Disclosures

If you are a corporate counsel for a public company that uses artificial intelligence (AI) in its operations, one of the significant emerging disclosure questions is whether your company (registrant) should disclose its AI use in its U.S. Securities and Exchange Commission (SEC) filings, such as a Form 10-K.

The answer is increasingly becoming yes. Many of the biggest public companies are doing just that by proactively disclosing their AI use in their SEC filings. And with the rapid development and deployment of the technology, very few public companies will be able to claim that they do not use AI in some form in the very near future. Indeed, failure of a registrant to disclose AI use may soon become an enforcement issue for the SEC, as it is already becoming one in the broker-dealer and investment adviser space.

So, if you are preparing AI disclosures in your registrant’s public filings, what should you do to keep the SEC at bay? Three suggestions follow.

1. Identify Clearly What AI Means to Your Registrant and How It Is Being Used
   
   AI covers a lot of machine learning—it refers to technologies that are beyond mere generative AI and ChatGPT. The registrants need to explain clearly what they mean by AI in the context of their operations.
   
   As SEC Chair Gary Gensler explained in a February 13, 2024, speech at Yale Law School, companies should consider the following questions: “[H]ow and where is [AI] being used in the company? Is it being developed by the issuer or supplied by others?” He also advised investment advisers and broker-dealers against saying that companies are using AI when they are not, or saying that AI is being used in a specific way when the company is not doing so—strongly suggesting that corporate counsel should not do this either.
2. Determine Whether Your Registrant’s AI Use Is at Least Potentially Material
   
   Once the AI is defined, the registrants need to assess whether their use of AI is potentially material to the investing public. Using the Supreme Court’s materiality standard from Basic, Inc. v. Levinson, a public statement is materially misleading when “there [is] a substantial likelihood that the disclosure of the omitted [or misstated] fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” 485 U.S. 224, 232–33 (1988).
   
   If your registrant discusses its AI use during an earnings call with analysts or in press releases reporting its quarterly financial results, the company’s usage of AI is likely material. Similarly, if the registrant’s AI use is discussed extensively in the boardrooms, the AI use is likely material.
3. Draft Accurate, Particularized Disclosures
   
   Once the decision is made to disclose a registrant’s use of AI, accurate and “particularized” disclosures need to be prepared. Making a materially false or misleading statement about a registrant’s AI use can invite an SEC enforcement action, as happened with two investment advisers on March 18, 2024.
   
   While the AI disclosures do not need to be exhaustive, they need to discuss the specific (and multiple) risks that a registrant faces in using AI. Also, a registrant needs to ensure that a company’s prospects based on AI—that is, projections of future economic performance based on AI—should have a reasonable basis, supported by an appropriate disclosure of the basis.
   
   Preparing appropriately succinct “particularized” risk disclosures on AI will become even more important if the Supreme Court significantly alters how public companies address Item 303 of Regulation S-K (Management’s Discussion & Analysis). Depending on how the Supreme Court decides Macquarie Infrastructure Corp. v. Moab Partners, L.P., investors may be allowed to bring a private cause of action under Securities Exchange Act § 10(b) against issuers that fail to make required disclosures pursuant to Item 303, even when the failure to disclose does not contain an otherwise misleading statement.

Concluding Words

In short, if a registrant uses AI, its corporate counsel need to consider disclosure obligations under the federal securities laws for the registrant’s AI use.