Investors Beware: AI Washing Is Just Getting Started

Artificial Intelligence (AI) washing is the latest buzzword captivating the tech industry.

Much like its predecessors—blockchain, green technology, and cloud computing—AI has not escaped the phenomenon of "washing," where companies inflate or falsify their association with a trendy technology to attract investments and public interest.

What is AI Washing?

AI washing occurs when a company exaggerates or misrepresents the extent to which its products or services utilize AI.

This practice can mislead investors, customers, and partners, creating a false perception of innovation and technological advancement.

In essence, AI washing is a form of corporate hype that capitalizes on the AI trend without delivering genuine AI capabilities.

Examples of Washing in Other Technologies

Remember the blockchain boom back in 2017?

Companies were slapping "blockchain" onto their names like it was going out of style, despite having no real application or integration of it.

Long Island Iced Tea Corp. even rebranded to Long Blockchain Corp., causing its stock to soar despite having no significant blockchain initiatives.

cnbc long blockchain headline

Similarly, with green technology, firms boasted about their eco-friendly practices, often overstating their environmental benefits.

Volkswagen (VWAGY), for example, faced backlash for falsely promoting their diesel engines as low-emission.

Then there's cloud washing—companies like Oracle (ORCL) were rebranding existing services as cloud-based, even when there was little to no cloud technology involved, just to attract investors.

Recent Examples: The Joonko Scandal

Let's dive into the recent Joonko scandal.

This is a prime example of AI washing in action. Joonko claimed to use advanced AI to help companies find diverse candidates to meet their diversity, equity, and inclusion goals.

Sounds impressive, right?

But it turns out, a lot of that supposed AI functionality was manual, lacking true AI capabilities.

The SEC charged Ilit Raz, the founder and former CEO of Joonko, with defrauding investors out of at least $21 million.

Raz told investors that Joonko had over 100 customers, including Fortune 500 companies, and provided fake testimonials about the effectiveness of its technology.

The SEC also revealed that Raz lied about the company's revenue and the number of active job seekers it had. Furthermore, she provided false bank statements and forged contracts to back up her claims when questioned by investors.

Raz now faces both civil and criminal charges, including securities fraud and wire fraud, each carrying a maximum sentence of 20 years in prison. Following the scandal, Joonko wound down its operations and filed for bankruptcy in May 2023.

The SEC Steps In

The SEC isn't taking AI washing lightly.

In March 2024, they charged two investment advisers, Delphia (USA) Inc. and Global Predictions Inc., with making false and misleading statements about their purported use of AI.

These firms agreed to settle the charges by paying a total of $400,000 in civil penalties​.

These cases highlight the SEC’s commitment to ensuring that companies are transparent and truthful about their technological capabilities.

According to SEC Chair Gary Gensler, "Investment advisers should not mislead the public by saying they are using an AI model when they are not. Such AI washing hurts investors.”

And he’s right.

Statistics and Market Impact

The global AI market is booming, with its value projected to reach $407 billion by 2027.

global ai market projection

However, this growth has been accompanied by increasing instances of AI washing, creating a lot of “froth.”

And what’s worse is that more and more investors will be fooled because of the sheer volume of companies promising rewards from this AI train.

Diligence Is More Important Now Than Ever

With AI washing on the rise, it's crucial for investors to be diligent and discerning. Here are a few tips to help navigate the AI investment landscape:

  1. Do Your Research: Understand the fundamentals of AI and assess whether a company's claims are realistic. Look for detailed explanations and evidence of how AI is integrated into their operations.
  2. Verify Credentials: Check the backgrounds of the company's leadership and technical team. Genuine AI companies will have experts with proven track records in the field.
  3. Seek Third-Party Validation: Look for reviews, case studies, and endorsements from reputable sources that can verify the company's AI capabilities.

So, while AI washing might be an "awesome and new" phenomenon, it's important to approach AI investments with caution. By staying informed and skeptical, investors can avoid falling victim to misleading claims and ensure their investments support true technological innovation.