The Big Story: Supreme Court hears about dangers of state social media laws, including to startups
The Supreme Court heard this week from the Internet industry, public interest groups, and more, about concerns with two state laws that would limit how Internet companies—including, indirectly, startups—moderate user content. In an amicus brief, Engine emphasized the need for startups to be free to curate their services as they see fit. The state laws being challenged—one in Florida and one in Texas—have high thresholds, but spell negative consequences for startups’ growth, and, if found constitutional, would greenlight future mandates that startups would not be able to afford.
The Texas and Florida social media laws were passed in 2021 and would have severe consequences for a wide range of Internet companies and the free expression of their users. And though the laws each have high applicability thresholds, those loop in many more services beyond the largest platforms like Facebook or X (formerly Twitter), and many startups that host a wide range of user content would have to consider the law’s limits and burdens as they plan to grow. Circuit courts issued divergent opinions about whether the laws violate the First Amendment, leading to the Supreme Court taking up and consolidating the cases.
For startups, the laws’ content moderation restrictions create practical problems, because moderating content to remove irrelevant to their users is a business necessity. A dating platform designed to create a safe experience for women needs the ability to remove abusive content, for example, but the laws would make many moderation decisions more fraught. Moreover, content moderation is already expensive, and the layers of expensive transparency and appeal obligations in the laws would further burden startups. The average seed-stage startup is working with around $55,000 in resources to cover everything—salaries, R&D, marketing, etc.—and adding more moderation costs will create a drag on growth. It will also create a drag on earning new investment, because investors want their money put toward growth, not compliance with a burdensome patchwork of moderation mandates.
The court is likely to hear the case sometime early next year. To enable the success of startups and keep the Internet competitive and innovative—as well as to ensure First Amendment protections when a platform decides not to publish or host something—the court should find these laws unconstitutional.
Policy Roundup:
Bill to collect data on startup ecosystem advances out of committee. This week, the Energy and Commerce committee passed H.R. 5398, the Advancing Tech Startups Act, which calls for collection of more data about startups and the federal agencies that impact the ecosystem. Ahead of the markup, Engine sent a letter to the committee expressing our support for the bill. Better startup data is necessary for the federal government to understand what resources would best support innovators, particularly underrepresented founders. Engine's "Innovation For All'' project highlights the challenges faced by underrepresented founders and encourages policymakers to help craft an equitable innovation ecosystem. This committee vote is a good first step to understanding how government can best support founders.
South Korea’s network fees kill video streaming, highlights the value of net neutrality. This week live streaming platform Twitch announced it is shutting down business in South Korea due to the country’s "prohibitively expensive" network fees. South Korea has recently doubled down on its “sender-pays” model, where companies, like Twitch, pay for the traffic they send on the network in addition to paying for network access. The model leads to high costs, reduced quality, and diminished user experience. Twitch, a very well capitalized company, exiting the Korean market should serve as a warning sign that underscores the value of an open Internet. In the U.S., The Federal Communications Commission is in the process of reinstating net neutrality rules that will ensure startups can compete.
Accredited investor definition on SEC’s agenda for reform. The U.S. Securities and Exchange Commission (SEC) Small Business Capital Formation Advisory Committee met this week to discuss the accredited investor definition. The full commission is expected to reform the criteria to qualify as an accredited investor in the new year, possibly making it more challenging for would-be investors to qualify and further shutting out underrepresented investors, including people of color and women. Expanding the pool of accredited investors would drive innovation, boost funding for diverse founders, and allow thousands to build generational wealth. Engine has long called for diversifying the investor pool in the ecosystem, including through expanding the definition of accredited investor and by passing the Expanding American Entrepreneurship Act to raise the cap on fund size and increase the number of investors that can contribute to angel funds.
Bill to reform Internet spy program sent to House floor. On Wednesday, the House Judiciary Committee passed by a bipartisan 35-2 vote the Protect Liberty and End Warrantless Surveillance Act, legislation that would significantly reform the controversial spying program known as Section 702. That program has been at the heart of legal challenges disrupting cross-border data transfers relied upon by startups, and the reforms in the bill should help mitigate concerns leading to those challenges. The bill’s supporters hope it will be brought up for a vote soon given Section 702 expires at the end of the year, but a competing extension of the program without reforms is likely to be attached to must pass legislation next week instead.
Engine highlights how to ensure competition in AI to the Copyright Office. In reply comments submitted this week as part of the Copyright Office’s study on copyright and AI, Engine underscored how creating clarity around model training would ensure the competitiveness of startups in the AI space. We responded to the Federal Trade Commission’s claims that including copyrighted works in training data without obtaining licenses could be an unfair method of competition, by outlining how a mandatory licensing regime would both misunderstand copyright law and only serve the interests of large entities. To keep the AI ecosystem competitive for startups, the Copyright Office should recognize ingesting information, including copyrighted works, is not infringing.
Startup Roundup:
#StartupsEverywhere: Arlington, Virginia. Arcascope translates the power of circadian rhythms into actionable products that help prevent shift work burnout. We spoke with CEO Olivia Walch about the impact of digital trade policies that enable cross-border data flows on her business, the current state of data privacy in the U.S., and her experience navigating recent changes in tax laws for startups.
