Investing in AI

Investment in AI-based businesses, whether through M&A, a joint venture, commercial partnership, or financial investment, can be complex. In addition to there being different investment models, all of which involve varying levels of benefit and risk (a number of which are discussed in this section), the introduction of AI to the equation adds a further level of complexity.

It is important to assess the investment opportunity holistically to determine which model (or hybrid of models) will result in the best outcome for the organisation or provide the best short to long-term return on investment.

Acquisition: An investor may wish to acquire the target entity or its assets and business. Depending on the commercial objectives, the acquired entity/business could be merged into the existing business or operated separately.

Joint venture: A joint venture is an agreement between parties to form a new legal entity in which they will each become a shareholder or member. A joint venture company generally will be formed to conduct a specific business, and exists and is operated separately from its owners. The parties will agree on the governance of the joint venture company, with risk and reward proportionately linked to their percentage shareholding or capital contribution.

Partnership: A partnership is an agreement between parties to work together towards a shared goal or for a shared purpose. No separate legal entity is formed and thus the parties’ contributions and obligations are defined only contractually.

Investment: Across sectors, where an investor principally seeks a financial interest in a business, rather than a commercial one, it may consider making a debt and/or equity investment. In this case the investor would become a creditor of and/or a shareholder in the company. A return on the investment would typically be realised upon a liquidity event, such as a sale or IPO.

The law has struggled to keep pace with the impact of rapid technology development and the emerging digital economy. Investors can find themselves operating in an uncertain regulatory environment. There have been calls for the development of AI-specific regulation and governance frameworks.

While much of this discourse is aimed at driving innovation in AI, the uncertainty will be a factor in investment decisions. It is also important to consider sector-specific regulation when investing in AI. Some sectors, such as financial services, are currently more heavily regulated than others. Most AI investments will carry an inherent risk that legislation may be introduced or amended at a later date which could potentially undermine the underlying business model or introduce compliance challenges for the organisation.

This section outlines the legal and practical considerations when considering an investment in an AI-based business.

At a high level, there are a number of pre-contractual considerations in the context of making an investment, including setting out the company’s objectives, understanding the type of AI into which the investment will be made and competitive landscape review.

Objectives
What is the purpose behind the transaction?   Is the AI system / AI business being acquired for the investor or does it want to invest in the AI business itself?
Understanding the type of AI
Identify what is being bought / invested in - technology, IP, key people, business model.   Does the target own it?   Will it survive integration and scaling and is it future proof?
Competitive landscape
Highly competitive investment market.   Auction processes may command a higher price than expected.   Increased competition may require a commercial view on warranties in underlying transaction documents.

The following sections set out the various practical and legal issues involved in investing in AI.