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The EU’s AI Act: A Quick Guide to Its Benefits for Startups and SMEs

EU AI Act: A Guide for SMEs and Startups
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George Chisuse, LL.M graduate from King's College London, is the founder and managing partner at VC Law. His expertise spans International Finance, Litigation, Contract, and Corporate Law. With a focus on cryptocurrency and blockchain, he's led projects involving compliance analysis for payment setups and innovative banking products. He provides insights into evolving legal trends in cryptocurrencies, AI, and legal tech.

The European Union has long been a beacon of innovation and harmonization in the digital sector, paving the way for transformative legal frameworks that foster growth and maintain balance. At the heart of this evolution is the proposed EU AI Act, a legislative endeavour that aims to establish order amidst the rapidly evolving AI industry. Notably, the Act emphasizes the integral role of startups and small to medium-sized enterprises (SMEs), proposing measures to cultivate their growth and bolster their impact in the AI field.

This article is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Laws differ by jurisdiction, and the information in this article may not apply to every reader. You should not take, or refrain from taking, any legal action based upon the information contained in this article without first seeking legal counsel in your jurisdiction.

Revolutionizing the digital landscape: the EU’s AI act and its strategic support for startups and SMEs

The EU AI Act is a crucial facet of the wider EU digital strategy, sculpting a landscape that nurtures AI development while maintaining key safeguards. The legislation strives to establish a set of AI rules that ensure a high level of public interest protection. This includes domains like health and safety, fundamental rights, democracy, rule of law, and environment, fostering a European AI ecosystem that mirrors Union values.

Interestingly, the legislation takes a proactive, forward-thinking stance. It anticipates challenges and strategically works to counter the main hurdles obstructing digital transformation. These include bridging the digital skills gap, fortifying cybersecurity measures, augmenting investment opportunities, and resolving disparities between large corporations, SMEs, and startups.

Now let’s dive into the AI Act’s specific provisions designed to build a nurturing and equitable business environment for SMEs and startups. From stipulations concerning ‘unfair contractual terms’ to the innovative concept of regulatory sandboxes, the EU is making concerted efforts to empower these vital contributors to the AI landscape.

Balancing the scales at an EU legislative level: the AI Act’s stance on unfair contractual terms

And so, one of the Act’s central protective measures is its position on unfair contractual terms unilaterally imposed on smaller businesses. This key safeguard aims to secure a level playing field in the dynamic AI industry.

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Crucially, the Act asserts that contractual terms imposed unilaterally by a larger enterprise on a SME or start-up will not be binding on the latter if the term is deemed unfair. This measure empowers smaller entities with the right to challenge and ultimately reject contractual terms that unfairly hinder their commercial interests.

The Act provides stringent criteria to ascertain the unfairness of a contractual term. A term may be deemed unfair if it “grossly deviates from good commercial practice” or “creates a significant imbalance between the rights and obligations of the parties in the contract.” In essence, terms that unduly favour one party — typically the larger entity — at the expense of the smaller business may be deemed unfair.

According to the projected Act an unfair contractual term is one that objectively impairs the ability of the SME or start-up to protect its legitimate commercial interest or grossly deviates from good commercial practice in the supply of tools, services, components, or processes that are used or integrated in a high-risk AI system, contrary to good faith and fair dealing. Specific examples of unfair terms include those that shift penalties or associated litigation costs across parties.

The Act also designates the burden of proof to the party that supplied the contractual term — usually the larger business. This party must prove that the term was not unilaterally imposed and that the smaller business had a fair opportunity to influence the contract’s terms. Importantly, the party that supplied the contested term cannot dispute its unfairness.

Now, let’s further unpack the AI Act, exploring other protective measures designed to champion the cause of SMEs and startups.

Empowering SMEs and startups: additional supportive measures in the EU AI Act

There are additional measures the legislation puts in place to foster an environment conducive to growth and innovation for startups and small and medium-sized enterprises (SMEs).

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A key provision of the EU AI Act is the establishment of regulatory sandboxes, which are controlled environments that allow businesses to test innovative products, services, and business models without the usual regulatory constraints. The Act stipulates that Member States should ensure these sandboxes are readily available and easily accessible, especially for SMEs and startups. These sandbox initiatives present an invaluable opportunity for the small scale providers to gain practical experience and refine their AI systems in a supportive and regulated environment.

In addition to this, the Act outlines the need for specific awareness-raising activities tailored to the needs of small-scale providers. Member States are urged to establish dedicated communication channels for these businesses, offering guidance and answering queries about the implementation of the Act.

Further to this, the Act emphasizes the importance of reducing certification and compliance costs for SMEs and startups. The European Commission is required to regularly assess these costs through transparent consultations and work with Member States to lower them where possible. This is a crucial aspect, as such costs can often be a substantial hurdle for smaller enterprises.

The Act also encourages Member States to ensure that documentation related to mandatory compliance and communication with authorities is available in languages that are broadly understood by a significant number of cross-border users. This consideration can help lower translation costs and ease the regulatory burden for providers, especially those of smaller scale.

Overall, these provisions underscore the EU AI Act’s commitment to supporting SMEs and startups. By removing barriers and fostering a supportive environment, the Act enables these enterprises to thrive in the evolving AI landscape. However, it’s essential to remember that navigating through these legislative provisions and understanding how they apply to individual businesses can be complex.

Navigating SMEs and startups through the EU’s AI Act: a practical guide for capitalising the opportunities

In our exploration of the EU’s AI Act, we have traced its strategic focus on fostering a supportive, inclusive environment for startups and SMEs. And now, we will guide these small but mighty enterprises on leveraging the benefits offered by the Act.

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The Act’s protective measures against unfair contractual terms should empower SMEs and startups to negotiate business relationships with greater confidence. In an industry often dominated by larger entities, these protections level the playing field, ensuring that smaller organizations can engage in beneficial partnerships without fear of exploitation.

In addition, the Act’s provision of regulatory sandboxes opens avenues for SMEs and startups to innovate, test and develop new AI systems in a secure and controlled environment. These spaces present opportunities for learning, experimentation, and collaboration, enabling smaller entities to contribute their unique expertise and perspectives in AI system development.

To fully capitalize on these opportunities, it’s advisable for startups and SMEs to dedicate resources towards gaining a thorough understanding of the Act’s provisions and how it applies to their specific business context. Regularly engaging in consultations and workshops offered by the Commission and the Member States can provide a deeper understanding of the Act and its implications for their business.

SMEs and startups should also actively participate in the Act’s cost assessment process. Providing feedback with a view to their expenses can help shape a more beneficial regulatory environment. Moreover, making use of dedicated channels for communication with authorities can help clarify regulatory queries and receive guidance.

Finally, SMEs and startups should remain agile and open to change. The AI Act underscores the rapid pace of innovation in AI markets and the evolving nature of business practices. Staying ahead of these changes will be crucial for businesses to thrive in this dynamic landscape. By leveraging the supportive measures within the Act, the small-scale providers can maximize their potential and become crucial players in the EU’s AI landscape.

The article is co-authored by Yoana Blyahova and Stephany Valcheva.

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