A Guide to Navigating the Complexities of GenAI in Investment

March 18, 2024

Written By Kwang Lim, Jeff Taylor, Lisa Kakoske and Ruth Pomislow.

In today's rapidly evolving technological landscape, the emergence of generative artificial intelligence (GenAI) presents both opportunities and challenges for investors, founders and companies alike. With GenAI generating new categories of valuable information, it is crucial to navigate this terrain thoughtfully and compliantly, especially considering the regulatory, legal and social considerations at play.

Bennett Jones recently discussed these considerations as part of the CVCA’s Invest Canada Webinar Series and are pleased to offer highlights from the panel. A recording of the webinar is available on CVCA's website. 

Understanding the Regulatory Landscape

The regulatory environment surrounding AI is evolving. The federal Canadian Bill C-27 introduces the Artificial Intelligence and Data Act, which include substantial compliance obligations and corresponding exposure. A key component of this draft legislation is the number of players in the AI 'food chain' who may be 'responsible' for compliance, which includes those involved in the design, development, making available for use, using or managing an AI system. At present, AI is regulated under privacy legislation to the extent the use of AI involves the collection, use or disclosure of personal information. Given the wide range of parties who may have responsibility under AI legislation, due diligence and thoughtful negotiation of terms will be critical to managing litigation exposure.

In addition to the Canadian AI legislation, foreign AI legislation such as the EU AI Act (which is expected to come into force in advanced of Canadian legislation) will impact investments in the AI space. The EU AI Act will have extra-territorial effect, as will the Canadian AI legislation.

On the regulatory front, competition laws such as the Competition Act could also come into play, as seen with the Federal Trade Commission's involvement in the United States. The draft AI Act includes provisions for information sharing between AI and competition commissioners, indicating potential coordination in regulating deceptive trade practices. Litigation risks, including class action lawsuits, contractual disputes and fraud/security concerns further underscore the need for careful navigation of the regulatory landscape.

Dealing with Risks and Challenges

Investors, founders and companies must approach GenAI investment and adoption carefully, leveraging the expertise of legal and regulatory experts. Investing upfront in understanding and addressing potential risks can prevent costly mistakes and existential threats to organizations. Establishing best practices, staying informed about regulatory developments and engaging with industry peers can inform decision making and mitigate risks effectively.

Integrating ESG Principles

As environmental, social and governance (ESG) principles gain prominence, evaluating proposed investments involving GenAI requires a nuanced approach. Ethical and moral considerations should be codified into firm policies, providing a framework for navigating regulatory changes and ESG requirements. Bias concerns inherent in GenAI platforms must be addressed, as biases can impact ESG targets and lead to misreporting.

The environmental impact of GenAI, including its energy-intensive nature also warrants consideration. Investors and companies must assess energy consumption throughout the AI lifecycle and negotiate access to information and reporting rights accordingly. Implementing guardrails and safety measures—such as system designs, terms of use and corporate policies—can mitigate social risks and protect against reputational damage.

Structuring Investments and M&A Deals

In structuring investments and M&A deals, due diligence is paramount. Provisions related to data privacy, security policies, training data access and model development should be negotiated to mitigate regulatory and reputational risks. Enhanced governance rights, negative covenants, approval rights and access to training materials are essential considerations to protect investors and companies.

Driving Innovation

Navigating the complexities of GenAI in investment requires a strategic and comprehensive approach. With careful consideration and proactive measures, GenAI can be leveraged responsibly to drive innovation and growth in diverse sectors.

For more information on emerging AI legislation and updates in the regulatory landscape, please contact Kwang, Jeff, Lisa or Ruth.

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