Published on Apr 15th, 2025 |

SEC Cracks Down on AI Misrepresentation

SEC RELEASES

Introduction

On April 11th, 2025, the SEC charged a Founder and Former CEO (“CEO”), for allegedly defrauding investors by making false and misleading statements about the company’s use of Artificial Intelligence (“AI”).

The CEO is accused of falsely claiming that the Firm’s App used automated technology that relied on AI to complete purchases made through the App without human involvement. However, much of the process was actually performed manually by contractors as the app was unable to use AI to complete purchases and this allowed the success rate in completing transactions to be lower than what was represented to investors.

Key Takeaways

Key Takeaways

  • Misleading Investors
    • The CEO allegedly misled investors by presenting the App as a cutting-edge AI tool, exaggerating its capabilities and market success.
  • False Claims About AI
    • The CEO claimed that the Firm’s App used AI to automate online purchases, but in reality, human contractors manually completed many transactions.
  • Documented Misrepresentations
    • Internal communications showed that the CEO, and the Firm’s employees knew the app’s functionality was largely manual, yet continued marketing it as AI-driven.
  • Fraud Allegations
    • The SEC alleges the CEO engaged in deceptive practices while raising over $42 million from investors.
  • SEC Charges
    • The complaint includes charges for:
      • Violations of Section 17(a) of the Securities Act of 1933.
      • Violations of Section 10(b) of the Securities Exchange Act of 1934.
      • Violations of Rule 10b-5 under the Exchange Act of 1934.
  • Timeframe
    • The misconduct is alleged to have occurred from at least Spring 2019 through December 2022.

Vigilant's Conclusion

Vigilant’s Conclusion

This case highlights the critical importance of transparency and accountability, especially when leveraging emerging technologies like AI.

Organizations must ensure that their use of AI aligns with actual capabilities and is communicated accurately to stakeholders.

Maintaining robust compliance frameworks, along with well-defined policies and procedures is essential, not only to avoid legal and regulatory consequences, but also to build trust.

These frameworks must be regularly monitored and enforced to ensure that representations of technology are truthful and that ethical standards are consistently upheld.

Connect with Vigilant to explore how our team of seasoned Compliance Professionals can perform a Gap Analysis of your current Compliance Program, a Mock Exam or on-going Compliance Support.

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