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As you consider any AI-related updates to your Form 10-K disclosures for calendar year 2024, take a look at this Orrick survey of AI-related comments made by the SEC Staff since 2021. The Orrick team identified 92 separate comments in letters issued to 56 companies, which were “well distributed across various industries, including technology, biopharmaceuticals and healthcare, real estate, retail, and financial services.”

Here are short excerpts on some trends they identified. Each of these is more fully explained in the article with additional examples given.

– Materiality. The SEC has advised companies to assess if discussions about AI in board meetings, earnings calls, and investor presentations suggest materiality and, if so, to provide corollary disclosures in SEC filings.

We note disclosure regarding the importance of AI to your business, including that your financial performance and growth will be driven in large part by the demand for AI workloads. Please revise your business section to more fully discuss the current state of AI and the potential obstacles to broad-based AI adoption. In addition, more fully discuss the current state of AI regulation within the United States and your other markets. Clarify what you would consider to be “unfavorable developments” with the potential to materially impact the company, as referenced on page XX.

– Immateriality. Interestingly, the SEC has also shown concern about immateriality, requesting companies to justify the inclusion of certain AI-related disclosures that do not seem material and to include examples of use cases that would be helpful for investors’ understanding.

Please tell us why you believe that the various AI-related programs in the timeline table disclosed are material enough to be included, especially considering the early stage of such programs and the lack of disclosure regarding these programs.

– Reasonable Basis. Approximately 30% of the SEC’s comments we reviewed addressed unsupported or unqualified statements.

Please revise the bullet points on page XX of the proxy statement to clarify, if true, that these are not yet products or services the company provides, and are instead areas of research or are aspirational. 

– Specificity and Balance. [A]pproximately 61% of the SEC’s comments we reviewed requested that companies that have disclosed AI-related initiatives, projects, or technologies clarify how the AI is or is intended to be used in those initiatives, projects, or technologies and any attendant risks.

We further note the disclosure that broad-based AI adoption is in its early phases and that AI-adoption is likely to continue and may accelerate. Please revise your business section to provide a more balanced discussion of AI. Include, without limitation, a discussion of the potential limitations, obstacles, and uncertainties associated with AI adoption, use, and commercialization.

– Define AI. 17% of the SEC’s comments we reviewed addressed the use of AI-related terminology and definitions.

Given the nature of your business, please consider including definitions of “AI,” “generative AI,” “deep learning,” “large language models,” “neural networks,” and any other industry-specific terminology.

Please explain how your software is properly characterized as AI or machine learning, rather than as an algorithm. 

– Other. 34% of the SEC’s comments we reviewed addressed other AI-related issues, such as IP, the collection and use of data implicated in AI applications, the involvement of third parties, how the AI was developed, validation of models, and disclosure inconsistencies.

– Meredith Ervine