Reddit, the popular social media platform, disclosed on Friday that it had received a letter from the Federal Trade Commission (FTC) regarding a non-public inquiry into the company's data-licensing practices related to the training of artificial intelligence systems. The disclosure comes as Reddit prepares for its highly anticipated initial public offering (IPO), which is expected to value the company at close to $6.5 billion.
In an updated IPO prospectus filed with the Securities and Exchange Commission (SEC), Reddit stated, "On March 14, 2024, we received a letter from the FTC advising us that the FTC's staff is conducting a non-public inquiry focused on our sale, licensing, or sharing of user-generated content with third parties to train AI models."
Although Reddit's core business relies on online advertising, generating 98% of its $804 million in revenue last year, the company has been exploring alternative revenue streams, including data licensing. Reddit noted that it is in the "early stages" of its "data licensing efforts" and believes that its growing platform data will be a key element in the training of leading large language models (LLMs) and serve as an additional monetization channel.
The FTC's inquiry comes in the wake of Reddit's expanded partnership with Google, announced in February, which grants the search giant access to Reddit's data to train its AI models, among other uses. Reddit also entered into data-licensing deals in January with a total contract value of $203 million over two to three years, expecting to recognize at least $66.4 million from these agreements in 2024.
Given the novel nature of these technologies and commercial arrangements, Reddit said it is "not surprised that the FTC has expressed interest" in the matter. The company stated, "We do not believe that we have engaged in any unfair or deceptive trade practice. The letter indicated that the FTC staff was interested in meeting with us to learn more about our plans and that the FTC intended to request information and documents from us as its inquiry continues."
Reddit acknowledged that dealings with regulators could be "lengthy and unpredictable" and could result in "substantial costs" and other probes and product changes that could "require us to change our policies or practices, divert management and other resources from our business, or otherwise adversely impact our business, results of operations, financial condition, and prospects."
The FTC's inquiry into Reddit's data-licensing practices comes at a time when the company is preparing to launch its IPO, which is set to take place during a historically slow period for tech IPOs. Reddit plans to sell shares at $31 to $34 each, and if successful, the offering would mark one of the most notable venture-backed tech debuts since Instacart and Klaviyo in September 2021.
The disclosure of the FTC's inquiry also follows a widespread protest from Reddit moderators over the summer, when the company announced a pricing change affecting some third-party developers using its application programming interface (API) to build apps. The API price hike was seen as necessary by Reddit to ensure adequate compensation from tech companies like Google and OpenAI, which use large amounts of Reddit data to help train and improve their AI models.
As the FTC's inquiry progresses and Reddit moves closer to its IPO, the company will need to navigate the complex landscape of data privacy and intellectual property laws while balancing its growth potential in the AI data-licensing market with the concerns of its users and regulators. The outcome of the FTC's investigation and Reddit's ability to successfully execute its IPO will be closely watched by investors and the tech industry alike.
