Reddit said Friday that the Federal Trade Commission has sent a letter to the company regarding its data licensing business related to the training of artificial intelligence systems.
“On March 14, 2024, we received a letter from the FTC informing us that FTC staff was conducting a non-public investigation focused on our sale, licensing, or sharing of user-generated content with third parties to train intelligence models artificial,” Reddit said in an updated initial public offering prospectus. Reddit filed for an IPO in February and plans to trade on the New York Stock Exchange under the symbol “RDDT.”
While Reddit’s core business relies on online advertising, the company is looking to make money in other ways and is in the “early stages” of its “data licensing efforts,” the document said.
Reddit said that “the opportunity does not conflict with our values and the rights of our Redditors,” referring to its users and forum moderators.
The 19-year-old company has filed to sell shares in its IPO at $31 to $34 apiece in an offering that would value the company at nearly $6.5 billion. Reddit is trying to hit the public market during a historically slow period for tech IPOs. There hasn’t been a noteworthy venture-backed tech debut since then Instagram AND Klaviyo in the month of September. Prior to that, the market had been largely closed since late 2021.
Reddit’s revenue increased 20% last year to $804 million. About 98% of its sales came from advertising. The remaining 2% includes the data license.
“These programs may subject us to evolving approaches to regulating this data and involve complex and developing data privacy and data protection, misappropriation, and intellectual property laws, rules and regulations,” Reddit said in the updated document.
An FTC spokesperson declined to comment.
Reddit said it had entered into licensing agreements given in January with a total contract value of $203 million over two to three years. It expects to recognize at least $66.4 million from these agreements in 2024.
The same week that Reddit filed for IPO, Google announced an expanded partnership with the company, giving the search giant access to data to train its artificial intelligence models, among other uses.
“We believe data from our growing platform will be a key enabler in the formation of leading large language models (“LLMs”) and serve as an additional monetization channel for Reddit,” the company said in its prospectus.
Reddit said it was “not surprising that the FTC has expressed interest” in the matter, considering “the novel nature of these technologies and trade agreements.”
“We do not believe we are engaging in any unfair or deceptive trade practices,” Reddit said. “The letter indicated that 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 investigation continues.”
Reddit noted that any dealings with regulators could be “long and unpredictable” and could involve “substantial costs” and other investigations and product changes that could “require us to change our policies or practices, divert management and other resources from our business, or would otherwise adversely affect our business, results of operations, financial condition and prospects.”
Reddit’s data licensing business has been at the center of a widespread outcry from Reddit moderators, who were upset over the summer when the company announced a pricing change that would affect some third-party developers using its application programming interface, or API, for building apps.
At the time the company stated that the API price increase was necessary to ensure that it was adequately compensated by technology companies such as Google and OpenAI, which siphons massive amounts of Reddit data to help train and improve the capabilities of their AI models. But several developers complained that the API update proved too expensive to continue running their Reddit apps, which some Redditors have used to help them moderate discussions.