The Big Story: States gear up to work on AI
State governments are pushing ahead on rules around artificial intelligence, teeing up policy conversations and changes in 2025 that will impact startups developing and deploying AI. In recent weeks California and Texas have taken steps forward on their own AI frameworks governing automated decision making and high-risk AI systems, respectively. Policymakers at all levels must support regulatory frameworks that foster innovation and competition.
Last month, the leader of the Texas legislature’s Innovation and Technology Caucus released a draft of the Texas Responsible AI Governance Act (TRAIGA), an AI bill set for consideration in 2025. After nearly a year of drafting and input from over 300 industry experts, the bill still leaves significant questions unanswered, particularly about how workable it will be for startups. TRAIGA takes cues from AI legislation in states like Connecticut and Colorado, but it goes further by applying to more AI systems, introducing record-keeping and reporting requirements, and allowing enforcement through private lawsuits, which can be easily weaponized against startups with limited resources. The bill also includes a small business exemption and a sandbox program, but these won't offset the challenges it creates for smaller players.
Meanwhile, in California, the California Privacy Protection Agency (CPPA) voted 4-1 earlier this month to advance regulations on Automated Decision-Making Technology (ADMT), which broadly encompasses AI capable of being used for significant decisions and profiling. These proposed rules would regulate the use and training of ADMT capable of making "significant decisions" in areas like health, employment, and housing, or "extensive profiling" activities, including to facilitate advertising. They would require businesses to create new notices and disclosures, and facilitate a range of new opt-outs—including from the use of the AMDT altogether, effectively requiring companies to provide a human alternative. If adopted, these rules will make it harder for startups to innovate in these spaces and are expected to cost companies around $30,000 to come into initial compliance, with thousands in ongoing annual costs—according to preliminary state estimates that experts consider to be low. The proposed regulations now proceed to a public comment period expected to close in late December, providing an opportunity for feedback on these controversial proposals. California-based startups are especially encouraged to submit their comments to ensure their perspectives are considered.
Efforts in Texas, California, and other states will add to the growing patchwork of state-level AI laws that—much like data privacy laws—require startups to spend significant time and money navigating compliance burdens. Policymakers should instead pursue a proactive policy agenda to support AI innovation and competitiveness, including efforts to grow the AI talent pool, create tailored voluntary guidance for responsible AI development, and provide AI resources to help startups compete.
Policy Roundup:
Deadline approaching for beneficial ownership information reports. The Financial Crimes Enforcement Network (FinCEN) announced limited extensions to Corporate Transparency Act (CTA) reporting deadlines, providing a six month filing relief for certain companies affected by recent natural disasters, while affirming that the January 1, 2025 deadline remains firm for most others. The CTA—enacted in 2021 to combat illicit finance and terrorist financing—now requires many private companies, including most startups, to file beneficial ownership reports with FinCEN. While large companies often have the resources and manpower to adapt to comply with ever evolving regulatory requirements, many startups face significant challenges in navigating new regulations and managing the associated compliance costs.
As startups grapple with digital trade barriers, Trump plans a trade shakeup. This week, President-elect Trump said he planned to nominate Wall Street executive Howard Lutnick to lead the Commerce Department, adding that Lutnick will also have “direct responsibility for the Office of the United States Trade Representative.” That will give the Commerce Secretary an unconventionally wide remit over U.S. trade policy, including digital trade policies that impact how startups can grow globally. In a recent blog post, we laid out how the incoming administration should reclaim U.S. leadership on global digital trade to help U.S. startups compete abroad.
Senate committee advances bill to change patent review board. On Thursday, the Senate Judiciary Committee passed the Promoting and Respecting Economically Vital American Innovation Leadership (PREVAIL) Act. Engine joined and sent letters highlighting issues with this bill that would make changes to the U.S. Patent Office’s Patent Trial and Appeal Board (PTAB). The PREVAIL Act raises standards and adds new requirements for the PTAB, which would make it a less affordable and accessible option for startups trying to defend or enforce their patents, as compared to going through the federal courts.
Australian Parliament report suggests expanding Internet regulation. A committee of the Australian Parliament focused on Internet and social media services this week released a report outlining a number of recommendations that could raise barriers to companies offering services there. The report recommended expanding the extraterritorial reach of Australian enforcers, imposing a duty of care upon Internet services, and requiring them to enable users to turn off personalized algorithms. The Greens, a minority party, separately dismissed proposed bans for users under 16 as insufficient and instead proposed the government pursue a Digital Services Tax designed to punish foreign Internet companies. Taken in broader view, the report comes as part of a widening unfriendliness to non-Australian services—including from startups—in the country.
New startup intellectual property course launches to support founders. The United States Patent and Trademark Office introduced an online certification course this week, designed to help startups navigate intellectual property protection. Entrepreneurs will earn a certificate upon completion and gain access to resources on IP tools, cybersecurity, and funding. Startups need balanced intellectual property frameworks that encourage innovation and interoperability and limit their exposure to costly litigation over intellectual property.
