What is the AI Act and Its Importance for US Startups?
The AI Act is one of the world’s first major legal frameworks designed to regulate the use of artificial intelligence (AI) by businesses. This legislation seeks to promote the uptake of human-centric and trustworthy AI while ensuring a high level of protection for health, safety, and fundamental rights as enshrined in the Charter of Fundamental Rights of the European Union.
The Act aims to ensure that AI is utilized in ways that are safe, transparent, non-discriminatory, and environmentally friendly, all while fostering innovation and competitiveness in AI development. The fundamental balancing act it tries to achieve involves mitigating major risks while encouraging companies to innovate.
“Risk” is the operative word here as businesses will need to understand the level of risk that their activities entail. The AI Act categorizes AI applications into four distinct risk categories:
- Unacceptable Risk: AI systems that pose a clear threat to fundamental rights and safety are prohibited. Examples include social scoring systems and biometric identification in public spaces.
- High Risk: AI systems that significantly impact fundamental rights or safety are subject to stringent regulations. This includes AI used in healthcare, law enforcement, recruitment, and financial services.
- Limited Risk: Applications like chatbots and recommendation systems must implement transparency measures to inform users they are interacting with AI.
- Minimal Risk: AI systems that pose little or no risk, such as spam filters or video game AI, face minimal regulation.
Does the AI Act Apply to US Startups?
While the AI Act is a law of the European Union (EU), US startups may still be impacted, especially if they are developing, selling, or deploying AI technology within Europe. The AI Act focuses on “developers, providers, or deployers” of AI in the EU. But what exactly do these terms mean?
According to the Act, a developer or deployer is anyone using an AI system under its authority, except for personal, non-professional activities. The use of this AI system might run the risk of affecting others, which the Act aims to mitigate. A provider is anyone that develops an AI system or a general-purpose AI model and places it on the market in the EU, regardless of whether the system is charged or freely available.
Relevance of the AI Act to US Startups
Several reasons illustrate why the AI Act is particularly relevant to US startups:
1. Compliance Costs and Legal Obligations
The AI Act introduces a new horizon of compliance headaches for many new startups. This could lead to the emergence of new businesses or consultancies aimed at helping US startups navigate the complex regulations and risk profiles present in the Act. For US companies developing AI solutions in Europe, compliance means incurring additional legal and operational costs. Companies that fail to meet these requirements could face heavy penalties, with fines reaching up to €35 million or 7% of global annual revenue, similar to those imposed by the General Data Protection Regulation (GDPR).
2. Supply Chain and Vendor Compliance
Even if a US company does not directly operate in Europe, its vendors, partners, or clients may still be subject to the AI Act, requiring the entire supply chain to adhere to compliance measures. Businesses providing AI-powered tools or software to European companies must ensure their products comply with the AI Act, which affects software vendors, cloud service providers, and data analytics firms.
3. Competitive Advantages
Compliance with the AI Act may become a distinguishing factor for competitors in the global market. Companies that proactively align with the AI Act’s standards may gain easier access to European markets and build trust with consumers and regulators. Conversely, businesses that delay compliance risk being excluded from lucrative markets or facing legal challenges.
Conclusion
The AI Act signifies a significant shift in how AI is regulated, with profound implications for US companies operating in Europe or engaging with European customers. While compliance may introduce additional costs and operational challenges, it also presents an opportunity for businesses to lead in responsible AI development and foster consumer trust. As AI regulations continue to emerge worldwide, startups that adapt early and comprehend their risk profiles will be best positioned to innovate responsibly using AI.
