General Disclosure Deficiencies – AI Washing

Overly Promotional Disclosure

On November 7, 2024, the Canadian Securities Administrators (“CSA”) released CSA Staff Notice 51-365 Continuous Disclosure Review Program Activities for the fiscal years ended March 31, 2024 and March 31, 2023 (“51-365”).  51-365 notes that the CSA have seen promotional activities by certain issuers leading to disclosure that is either untrue or unbalanced including disclosure and promotional campaigns that provide unbalanced or unsubstantiated material claims about the issuer’s business. Recently, the CSA has noted that such promotional activities have included AI washing.

AI washing is when an issuer makes false, misleading or exaggerated claims about its use of AI systems in its products or services, to capitalize on the growing use of and investor interest in AI systems. In 51-365, the CSA identified AI washing in continuous disclosure (“CD”) documents and in prospectus filings. When describing current and proposed products, services or activities, issuers must not make false, misleading and exaggerated claims about their use of AI systems. It is important to ensure that all public disclosures, whether voluntary or required are factual and balanced.

The CSA identified the following examples which were included in the issuer’s CD record:

• The company utilizes the most advanced AI technology.
• The company’s warehouse houses the most sophisticated AI robotics.
• The company uses AI to solve world issues.
• The company’s use of AI modernizes the company’s business processes and will disrupt the industry in which it operates.
• The company’s business operates in a leading global artificial intelligence domain.
• The company in its public filings only discussed its acquisition and development of AI technology and it appears to be the only business of the issuer.

First, in the above examples, the CSA note the issuer made unsubstantiated claims regarding the capabilities of its technologies. When statements are not supported by facts and corporate activities, they are misleading and promotional, thus inappropriate.

Second, the CSA note the issuer described itself as being a global leader and disruptor despite having generated only nominal revenue from its operating activities. Making broad statements without supportable financial statement performance measures and additional detail regarding the particular aspects of its business or how the capabilities of the business will be measured and evaluated, is misleading and promotional.

Third, the CSA note the company’s CD record focuses entirely on AI technology; however, on review, substantially all of the company’s revenue came from the sale of general appliances. Without operating segment disclosure and relevant MD&A (management discussion and analysis), this is misleading because an investor reading the company’s CD record would reasonably assume all of the company’s revenue is from its AI activity.

The foregoing is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, please contact the author who would be pleased to discuss the issues above with you, in the context of your particular circumstances.