The fog lifted a little this month when EU lawmakers approved draft AI legislation, making the bloc the first major regulator to do so.
June 29, 2023 (Preqin News) - As investor excitement around artificial intelligence (AI) has accelerated in recent years, concerns over regulation failing to keep up have lingered. The emergence of ChatGPT only added to expectations that boundaries might be needed.
The fog lifted a little this month when EU lawmakers approved draft AI legislation, making the bloc the first major regulator to do so. But for those seeking to commit investment capital to AI, legislative uncertainty is likely to remain until other jurisdictions have determined their own frameworks. Undoubtedly this will influence when and where VC investors can direct their funds.
More than two years after work began on the legislation, the European Parliament on June 14, 2023 adopted a negotiating position on the AI Act. The proposed Act assumes a sliding scale of four categories ranging from ‘unacceptable risk’, where systems would be banned, to ‘minimal or no risk’, where systems could be used freely.
Ahead of the draft legislation, the expected announcement by the Commission prompted expectations ranging from optimism that investors and developers would finally get some clarity on AI, to concern that the rules would stymie development and drive investment out of the bloc.
In a survey by industry body AppliedAI at the end of 2022, 51% of respondents said that they expected their AI development activities to slow down as a result of the proposed Act. A further 16% said they would consider relocating outside the EU, most likely to the US or UK, or ceasing to develop AI. Almost three-quarters of the participating VC firms expected the legislation to reduce the competitiveness of EU-based start-ups in AI.
AI investments continue to flow
There is little sign of that yet. According to Preqin data, 251 rounds with aggregate deal value of $2.2bn have been completed by EU-based AI start-ups as of June 23 this year, exceeding the 225 investments and $1.4bn capital raised in H1 2020, before the pandemic VC boom distorted longer-term trends.
That is dwarfed by the figures for the US, where $27.3bn has been raised during the same period this year, although that figure has been boosted by Microsoft’s giant $10bn investment in OpenAI. That compares with $17.7bn attracted in H1 2020. In China, VC funding ($4.1bn) so far this year has dropped below the pre-pandemic level of $5.6bn in H1 2020, while in the UK, this year’s investment ($1.1bn) matched capital deployed in H1 2020.
Following the publication of the draft legislation, Invest Europe, which represents the region’s private equity, venture capital, and infrastructure investment firms, said it welcomed the EU’s ‘ambition to lead the way on AI regulation’. But it also urged lawmakers to reflect on whether the regulatory limits currently on the table for generative AI would allow EU companies to be part of its ‘global economic future’.
‘Introducing landmark and far-reaching legislation on AI, while simultaneously trying to boost EU AI capabilities and de-risk from other blocs presents a dichotomic challenge,’ Invest Europe writes in a position paper about the draft legislation. ‘Robust regulation is needed to protect citizens’ rights and instil trust in AI systems. However, the EU must ensure that it does not inadvertently hinder the innovative capacity or discourage investment from European AI, which could potentially drive AI talent and investment outside of Europe.’
Digitaleurope, a trade association representing Europe’s digital industries, said: ‘Whilst we still feel improvements can be made, this text is something we can work with and a good basis for further discussions.’ Its recommendations include the need for a ‘focus on the international level to align on standards and terminologies.’
Where EU leads, others may follow
While the EU draft gives investors some visibility over the future of AI regulation, until other governments make their positions clear, it remains uncertain how attractive Europe will be for AI investment and development relative to other parts of the world. However, given the complexity of the regulation process and the speed of AI’s advance, some suggest that progress in Brussels may influence other jurisdictions.
‘If the EU sticks to its timetable of adopting the AI Act by the end of the year, its legislation could shape other countries’ efforts significantly by virtue of being early out of the gate and comprehensive in nature,’ commented Kenneth Propp, non-resident senior fellow with the Atlantic Council’s Europe Center, after the EU’s announcement. ‘Countries more concerned with promoting AI innovation, such as the United Kingdom, may stake out a lighter-touch approach than the EU, however.’
In the US, the White House Office of Science and Technology Policy has published a blueprint for an AI Bill of Rights, adopting a narrow, sector-based approach rather than the broad, risk-based legislation of the EU. Senate Majority Leader Chuck Schumer, has announced plans to regulate the technology, starting with a series of panel forums later this year.
China’s internet regulator set out draft rules in April, outlining measures to underpin national security and societal values. A month beforehand, a UK white paper had advocated a pro-innovation approach to AI regulation, asking existing regulators to take responsibility for the establishment, oversight, and promotion of AI tools in their respective industries.
Europe’s 'decisive role'
This month, Lightspeed Venture Partners led a €105mn seed funding in France’s Mistral AI, the largest early-stage European AI investment. The US-based VC firm said in a statement: ‘We believe that Europe has a decisive role to play in the AI field. As the politicians and European leaders recognise the importance of their role in this new emerging world order, it is imperative that Europe remains a fertile ground for innovation to uphold European values but also further contribute[s] to European digital sovereignty.’
For now, the European Parliament’s draft gives VC firms and start-ups a little of the clarity they need to push ahead, while adopting a wait-and-see approach to discussions elsewhere.