to the point: technology & digitalisation l April 2023

Embracing change: Our commitment to navigating the legal landscape

As we find ourselves firmly entrenched in the era of artificial intelligence (AI), it has become apparent that this ground-breaking technology is revolutionising not only the way we live and work, but also the legal landscape that governs its use. At Schoenherr, we are dedicated to staying at the forefront of these developments, ensuring that our clients are well-equipped to navigate the complex web of AI-related legal matters.

AI is undoubtedly on everyone's mind these days. Its rapid advancement has led to an increasing number of applications across various industries, from healthcare and finance to manufacturing and transportation. However, alongside these opportunities come the challenges of addressing the legal, ethical and regulatory aspects of AI implementation.

In response to these developments, and as a technology-focused firm, we have established an AI Team comprising dedicated and enthusiastic experts to keep up with the latest trends and innovations in the field. This expert team understands the unique legal issues that arise in the age of AI, such as data privacy, intellectual property rights, liability and regulatory compliance.

We are also excited to announce the launch of our new AI-focused sub-website. This dedicated resource centre will provide information on the rapidly evolving legal landscape surrounding AI, including insights, articles and case studies that showcase our expertise in this field. As AI technology continues to grow, we are committed to ensuring that our content grows too. You will find the sub-website here.

By maintaining a dedicated team and offering a comprehensive resource, we aim to help you stay informed about the latest developments and legal challenges in the AI landscape.

We invite you to explore our new AI sub-website and encourage you to embrace the opportunities and address the challenges that lie ahead in our AI-driven future.

A full house and exciting debates! Tech night 2023 was a great success and we very much enjoyed this evening full of interesting IP & technology topics with special focus on artificial intelligence. Together with our external guests and with all the know-how of our Schoenherr experts, we were able to shed light on and initiate new debates.

Huge thanks to all participants and external speakers - GROPYUS (Bernd Oswald), speedinvest (Nora Frizberg), 3VC (Peter Lasinger), Platomics (Christoph Hinz), Bundesministerium für Finanzen (Julia Fuith) and YPOG (Benedikt Flöter) – as well as to our Schoenherr experts leading through the evening!

Interested to learn even more? Find more legal updates in the area of technology & digitalisation in the wider CEE region below.

Series Seed, Series A, Series B, Series C or even Series A-2, Series B-2 or Series Pre-seed, etc. You have probably heard about these classifications associated with financing rounds, but it can be challenging to understand them all. There is no legal definition. Sometimes there is also no clear distinction between rounds. The following therefore provides you with an overview of the most common financing round classifications:

1. Pre-seed: The Pre-seed round is the earliest stage of fundraising for start-ups, typically taking place before the start-up has a viable product. It involves raising small amounts of capital mostly from founders, friends and family to validate the idea, conduct market research and develop a prototype or minimum viable product (MVP).
2. Seed: The Seed round is the next stage of fundraising after the Pre-seed round. At this stage, start-ups have typically developed an MVP and have an initial market presence. Seed rounds are often used to refine the product, scale the team and acquire early customers. Seed round investors can include angel investors, venture capital (VC) firms and strategic partners. The amount raised in a Seed round can vary widely, but it is generally higher than the Pre-seed round.
3. Series A: The Series A round is typically the first institutional funding round for start-ups. At this stage, the company has achieved a significant presence in the market and is looking to scale its operations. Series A rounds are usually led by VC firms and involve larger investments compared to Pre-seed and Seed rounds. Series A funds are used to scale operations, invest in marketing and sales, and further develop the product or service.
4. Series B, C, D and beyond: Once a start-up has successfully raised a Series A round, it can continue to raise additional rounds of funding, such as Series B, C, D and so on. These subsequent rounds are often used to further accelerate growth, expand into new markets or make strategic acquisitions. The size of the rounds and the valuation of the company typically increase with each subsequent round as the start-up progresses towards maturity.
5. Other financing rounds: Apart from the common Pre-seed, Seed and Series A, B, C and D rounds, there are other financing instruments that may be relevant, such as convertible loans or SAFEs (simple agreement for future equity). These allow investors to provide capital in exchange for equity in the future, typically at the next priced financing round, and are commonly used in early stages when valuations may be uncertain and/or as bridge financing between two priced rounds.

In principle, each financing round has its own purpose, characteristics and implications. Classifications should be aligned with the stage of development of the start-up. Some start-ups want to avoid going down the alphabet too far and so they sometimes decide to name a new round an extension of the preceding round. Typically, this happens when a new financing round is done on the same terms and mostly with the same investors as the preceding round but with a different share price. In such cases a Series A-2 may follow a Series A instead of a Series B, for example.

What to remember: classifications of financing rounds help to discuss how early or late stage a company is.

Start-up investing has become increasingly popular in recent years as more people seek to get in on the ground floor of innovative companies with high growth potential. There are several types of investors that participate in start-up funding, including angel investors, venture capitalists, corporate investors, crowdfunding platforms, accelerators, incubators, and even family and friends. Each type of investor has their own set of criteria and expectations, but they all share a common goal: to identify and support promising start-ups that have the potential to disrupt industries and generate significant returns. Below you will find a summary of the most common investor types in the start-up ecosystem:

1. Business angels: These are wealthy individuals who invest their own money into early-stage start-ups. They typically invest between EUR 25,000 and EUR 100,000 in exchange for equity in the company.
2. Venture capitalists (VCs): VCs are professional investors who manage funds that invest in start-ups. They typically invest larger amounts of money (from EUR 1m to EUR 10m) in exchange for equity in the company. However, within VC investors, there is again a variety of funds focusing on different stages of start-ups and financing rounds:
   1. Pre-seed investors: These VCs focus on investing in start-ups at the very earliest stages of development, often before a product or service has been fully developed. Pre-seed investors provide funding to help start-ups get off the ground and begin building their team and product. They typically invest smaller amounts of money (up to EUR 1m) and take a high risk in exchange for a potentially high return.
   2. Seed investors: Seed investors focus on investing in start-ups that have developed a prototype or have launched a product or service but are not yet generating significant revenue. They provide funding to help start-ups expand their team, develop their product further and begin to scale. Seed investors typically invest between EUR 1m and EUR 3m.
   3. Series A investors: Series A investors focus on investing in start-ups that have achieved some level of traction and are generating significant revenue, but still require additional funding to continue growing. Series A investors provide funding to help start-ups expand their team, develop new products and features, and scale their customer acquisition efforts. They typically invest between EUR 3m and EUR 15m.
   4. Series B investors: Series B investors focus on investing in start-ups that have achieved significant traction and are poised for rapid growth. Series B investors provide funding to help start-ups expand into new markets, acquire new customers and scale their operations. They typically invest between EUR 15m and EUR 50m.
   5. Series C and later stage investors: These VCs focus on investing in start-ups that have achieved significant scale and are preparing for a potential IPO or acquisition. Series C and later stage investors provide funding to help start-ups continue to grow, develop new products and features, and expand into new markets. They typically invest larger amounts of money (over EUR 50m) and take a lower risk in exchange for a potentially lower return.
3. Corporate investors: These are large corporations that invest in start-ups in order to gain access to new technology or to form strategic partnerships.
4. Crowdfunding: Crowdfunding involves raising funds from a large number of people, typically through online platforms. This can take the form of reward-based crowdfunding (where backers receive a product or service in exchange for their investment) or equity crowdfunding (where backers receive equity in the company).
5. Accelerators and incubators: These are organisations that provide funding, mentorship and resources to early-stage start-ups in exchange for equity. They typically have a structured programme and take a hands-on approach to helping start-ups grow.
6. Family and friends: This refers to raising money from personal networks, such as family members or close friends. It is important to approach this type of investment with caution, as it can strain personal relationships if the start-up fails to perform as expected.

On 23 March 2023, the Serbian government adopted Ethics Guidelines for the Development, Implementation and Use of Reliable and Responsible AI ("Guidelines"), which may be seen as yet another step in the process of harmonising Serbia's legislative framework with the European Union, following the Proposal for an AI Regulation announced by the EU Commission two years ago. The Guidelines largely rely on UNESCO's Recommendation on the Ethics of AI adopted in 2021, which Serbian representatives also helped create. Since the EU is awaiting its regulatory framework on AI, Serbia took the first step down this road as well.

Read the full article here.

The European Data Protection Board (EDPB) adopted a decision to resolve a dispute regarding data transfers to the United States by Meta Platforms Ireland Limited related to its Facebook service. The EDPB's binding decision plays a crucial role in ensuring the correct and consistent application of the GDPR by national Data Protection Authorities (DPAs). The decision clarifies whether the Irish DPA should include an administrative fine and/or additional compliance order in its final decision, which must be adopted no later than one month after notification of the EDPB's decision.

Furthermore, the EDPB assessed the Italian DPA's recent enforcement action against Open AI's ChatGPT service and agreed to establish a task force to encourage cooperation and information exchange on potential enforcement actions by data protection authorities.

The Italian Data Protection Authority recently banned ChatGPT in Italy due to allegations of unlawful collection of personal data and the lack of an age verification system for children. Also, a data breach affecting ChatGPT users' conversations and data on payments occurred at the end of March.

The Italian proceedings will likely also affect other EU Member States. If the Italian DPA can sufficiently demonstrate a breach of the GDPR, other DPA's may follow the Italian example and ban ChatGPT.

Update: In the meantime, the German AI Taskforce of the DSK has also addressed this issue and initiated investigations.

Click here to have a closer look.

The European Data Protection Board has published its annual activity report for the year 2022. The report provides insights into the activity and work of the board, includes the results of a guidance review conducted with various stakeholders and, most notably, a thematic executive summary with a selection of examples of final one-stop-shop decisions.

According to the Chair of the Board, Andrea Jelinek, the EDPB's role has changed since 2018 and it is now a major player in the EEA digital economy. By ensuring that data protection regulations are applied consistently throughout Europe, Jelinek says, it helps shape Europe's digital future. In particular, it will help redress a balance that has tipped too far in favour of big tech companies.

The highlights of the report include information on enforcement cooperation between the data protection authorities of the EU Member States and on the calculation of administrative fines under the GDPR (according to the Guidelines 04/2022).

Get the report here.

The first quarter of 2023 has been a fruitful and busy time for the EDPB. The EDPB published its annual report 2022 (for more details see above and adopted a dispute resolution decision based on Art. 65 GDPR concerning Meta transfers and initiated ChatGPT task force (for more details see above. In addition, on 28 March 2023, the EDPB discussed and adopted, among others, the following: (i) final version of the "Guidelines on data subject rights – right of access", which consider various aspects of the right of access and provide more precise guidance on how the right of access must be implemented in different situations; (ii) final version of the "Guidelines on identifying a controller or processor's lead supervisory authority", which describe the role of the supervisory authority in data processing activities; (iii) final version of the "Guidelines on personal data breach notification under GDPR" tackling the issue of executing Articles 33 and 34 of the GDPR; (iv) "Report of the work undertaken by the supervisory authorities within the 101 Task Force" concerning data transfers, the principle of accountability and the allocation of roles.

On 18 April 2023, the European Commission published a proposal for a regulation of the European Parliament and of the Council laying down measures to strengthen solidarity and capacities in the Union to detect, prepare for and respond to cybersecurity threats and incidents (available here). The act is aimed at supporting detection and awareness of cybersecurity threats and incidents, bolstering preparedness of critical entities, as well as reinforcing solidarity, concerted crisis management and response capabilities across Member States. The European Commission plans to achieve the above through: (i) the deployment of a pan-European infrastructure of SOCs (European Cyber Shield) to build and enhance common detection and situational awareness capabilities; (ii) the creation of a Cyber Emergency Mechanism to support Member States in preparing for, responding to and immediately recovering from significant and large-scale cybersecurity incidents; (iii) support for incident response to European institutions, bodies, offices and agencies of the Union; and (iv) the establishment of a European Cybersecurity Incident Review Mechanism to review and assess certain significant or large-scale incidents. The European Parliament and the Council will now examine the proposed Regulation on the EU Cyber Solidarity Act.

The European Commission has released a proposal for a new directive on digitalising company law in the European Union. The proposed directive, presented on 29 March, aims to improve the use of digital tools and processes in EU company law and include several key changes:

• Implementation of the "once-only principle": formalities in relation to the use of company information in cross-border situations will be reduced. Companies will thus no longer be asked to submit information that is available for a national business register to other foreign business registers when establishing a branch or a company in another Member State.
• An EU Company Certificate, containing a basic set of information about companies, will also be made available for free in all EU languages.
• A multilingual standard model for a digital EU power of attorney will authorise a person to represent the company in another Member State.
• The need for an apostille or certified translations of company documents will be abolished.

Additionally, the European Commission aims to improve transparency for cross-border activities. The Business Registers Interconnection System (BRIS) will be connected to national beneficial owner and insolvency registers to facilitate the search for information on companies. In addition, the amount of publicly available company data in national business registers and/or through BRIS will be increased. Lastly, the proposed directive aims to ensure that company data in national business registers is accurate, reliable and up-to-date.

Proposed timeline by the European Commission: Adoption of the Directive in 2024. Implementation and application of the new rules by the Member States by 2028.

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