As AI continues to rapidly evolve, investors must adapt their due diligence to address emerging risks. Many regulations are outdated, and overlooking key red flags can lead to costly legal and operational challenges.

AI companies rely on vast datasets, but unauthorised data usage can lead to significant legal liabilities. Investors must ensure companies have secured proper permissions or licenses. High-profile lawsuits, such as those involving Getty Images and The New York Times, highlight the importance of intellectual property compliance. Failure to secure data rights can impact valuation and growth potential.

Moreover, AI regulations are tightening globally, with laws like the EU AI Act, which entered into effect in August of 2024, imposing stricter requirements. Regulatory uncertainty can force businesses to restructure, impacting profitability and exit strategies. Early-stage AI companies may struggle to anticipate these changes, making planning for investor due diligence crucial.

Because of these factors, AI investments present unique valuation risks. Investors must assess the business’s applications, competitive advantage amid rapid AI developments, and the potential for legal liabilities when assessing valuations.

Engaging legal, technical, and regulatory experts is essential for any investor, but particularly those looking at the AI space. Companies must make their investment proposition clear and structure materials to be as transparent as possible about data sources, legal risks, and regulatory future-proofing to make them more appealing for investment.