Introduction
The increasing reliance on artificial intelligence (AI) in business operations has led to heightened scrutiny of AI-related disclosures. This scrutiny is particularly evident in the financial sector, where companies may face legal and financial repercussions for misrepresenting their AI capabilities.
Description
Two companies settled for $400,000 after the SEC found them to have misrepresented their use of AI in marketing to clients and prospective clients [1]. In early 2025 [1], investors initiated securities litigation against these companies for alleged AI washing [1]. The first case involved claims that one company misled investors about its AI capabilities and reported inflated financial results [1], which were later challenged by short-seller reports [1]. The second case involved a class action lawsuit where the plaintiff alleged that the company exaggerated its ability to leverage AI in the smartphone upgrade cycle [1], leading to investments at artificially inflated prices [1].
This situation highlights the critical importance of accuracy in AI-related disclosures, especially as enforcement activity may fluctuate [2]. Companies are incentivized to present themselves as leaders in AI to attract investors [2], which can lead to inflated share prices. However, if the anticipated benefits of AI do not materialize [2], it can result in significant declines in share prices and potential securities class action lawsuits [2].
One notable instance involved a company that [2], between May 2023 and February 2025 [2], made optimistic claims about its digital ad platform and AI technologies [2]. Despite reporting strong financial results during this period [2], the company faced a sharp decline in share price following disappointing fiscal results and lowered guidance [2], attributed to increased competition [2]. This underscores the necessity for companies to carefully scrutinize AI-related statements before public release to avoid serious legal implications [2]. Companies should also consider the FTC’s guidance to navigate their sales and marketing strategies effectively and avoid similar pitfalls.
Conclusion
The cases underscore the significant impact of AI-related misrepresentations on investor trust and company valuations. Companies must ensure the accuracy of their AI disclosures to maintain credibility and avoid legal challenges. As AI continues to play a pivotal role in business strategies, adherence to regulatory guidance and transparent communication will be crucial in mitigating risks associated with AI misrepresentation.
References
[1] https://www.jdsupra.com/legalnews/what-is-ai-washing-and-why-are-1516104/
[2] https://www.thecorporatecounsel.net/blog/2025/03/ai-washing-recent-class-actions-show-you-still-need-to-watch-what-you-say.html
