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The need for deeper due diligence in a world of new technology-related risks

AI companies are growing at a rapid pace and must comply with likely out-of-date regulations. As such, companies, investors, and advisors must be weary of new hurdles when performing due diligence, given that red flags uncovered in processes can derail transactions and, if left undiscovered, be very costly.

A large risk pertaining to AI companies is copyright issues in datasets used to train AI models. If an AI model has been trained with datasets from websites or parts of the Internet it does not have lawful access to, then this should show up during due diligence. Permissions, which may be expensive, are required to use data. If permissions are not an option, data will need to be replicated, which may or may not be possible - another red flag for buyers. This may affect valuation and / or company integration. IP lawyers should be consulted in early-stage due diligence to avoid future issues. For example, Getty Images is suing text-to-image AI generator Stability AI and The New York Times is suing OpenAI and Microsoft to protect their data.

Another area advised for deeper due diligence is future regulations affecting operations. Given that the sector is still relatively young, the regulatory world is playing catch-up. As such, new regulations will come into practice in coming years. AI investors should be aware of the risks this may pose, and it is difficult for investors to quantify this risk.

Acquisitions of and investment in AI assets may need a different due diligence framework. Experienced investors and advisors will need to find ways to quantify new and often misunderstood risks.

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