The technology sector was buffeted by sliding valuations and declining transaction activity in 2023.

A steep sell-off in growth stocks and a drop in technology IPOs stood in stark contrast to the unprecedented run of technology listings at the peak of the bull market in 2021. Big-ticket corporate technology deals also dried up, with the frenetic pace of private equity investment in software assets slowing, too.

Despite the slide in technology activity, the sector continued to account for an outsized share of M&A and IPO activity, with deal opportunities boosted by a boom in GenAI.

The growth of the AI sector has been so rapid that companies and regulators have scrambled to understand the effects AI will have on employment, security and business models. The application of existing law to AI and the development of new regulatory and legal frameworks for AI have been shifting at pace as a result, with policymakers and business also grappling with ongoing developments in the spheres of data privacy and cybersecurity.

In this new landscape, White & Case worked closely with technology companies and investors to make sense of the transformative change reshaping the technology sector and the impact of that change on the global economy and wider society. These are some of the main themes we observed throughout 2023.

GenAI energizes deal activity

Transaction activity in established technology verticals, such as software, may have slowed last year, but this was counterbalanced by a surge of investment in GenAI, artificial intelligence that is able to use a range of inputs to generate new content such as text, audio or images.

According to Bloomberg Intelligence, the GenAI market, worth US$40 billion at the end of 2022, is forecast to grow to US$1.3 trillion by 2032. This has sparked a flurry of M&A activity, as companies and private capital investors race to build exposure to high-growth GenAI companies.

High-profile deals have included Microsoft investing a reported US$10 billion for a 34.5 percent stake in OpenAI, the developer of ChatGPT, which also received US$300 million from a group of investors including Sequoia Capital, Andreessen Horowitz, Thrive and K2 Global. Other deal highlights included French startup Mistral AI receiving a US$113 million investment just four weeks after launching in Europe's largest-ever seed round and one-year-old chatbot developer Inflection AI landing a US$1.3 billion fundraising backed by Microsoft and Nvidia.

Regulators play catch-up

The unprecedented development and adoption of GenAI caught the attention of regulators across the world. But while they have tried to move quickly to keep up with the speed of the technology, a "common approach" to a regulatory and legal framework for AI has yet to emerge. As a result, courts and regulatory agencies are determining how existing legal and regulatory frameworks apply to AI on a case-by-case basis.

Many researchers, policymakers and tech executives around the world have argued that this technology is global and that an international framework may prove the optimal route to ensure it is implemented safely and that a consensus exists on limitations on AI use cases.

As things stand, however, the regulation of AI appears to be diverging, with countries regulating it in line with their distinctive societal values and legal systems. In China, for example, regulation has been centered on government oversight and involvement in the development of AI, but in the EU, which is in the process of implementing an AI Act, the focus has been on classifying AI models according to levels of perceived risk and prioritizing human rights and privacy.

In the US, meanwhile, President Biden signed an executive order that takes a lighter touch approach to AI regulation, aimed at unlocking the benefits of AI innovation but also ensuring that risks are mitigated through various measures, including mandating the development of federal standards; requiring developers to share results of safety tests; and requiring federal agencies to detect and denote AI made content.

Progress toward uniting approaches to AI oversight came at the end of 2023 at the world’s inaugural AI Safety Summit held at Bletchley Park in the UK. More than 100 global political and business representatives gathered at the summit, where all governments present signed the Bletchley Declaration, recognizing the substantial risks that may arise from the misuse of AI and affirming the importance of global cooperation to mitigate such risks. The declaration was heralded as a big step toward aligning AI safety standards. However, practical and political difficulties in agreeing on global standards make quick adoption unlikely, so businesses should prepare for differing national and regional frameworks, as courts and regulatory agencies apply existing law and new legislation or regulations are adopted.

Cybersecurity and data protection also on the radar

AI hasn’t been the only area in technology where regulators and policymakers have been moving quickly to implement suitable regulation. Regulatory frameworks are also changing rapidly in the areas of cybersecurity and data privacy.

On the cybersecurity front, the US Securities and Exchange Commission (SEC) has proposed new rules that will obligate companies to disclose cybersecurity program practices and policies. The scope of the rules is unprecedented and will require companies to tread a careful path between making disclosures without opening up their organizations to the risk of hacks or cyberattacks.

Data privacy frameworks and legislation have also moved rapidly. In the US, as of December 2023,13 states had passed comprehensive data privacy laws. On the international front, the US and Europe agreed on a revised framework for transfers of personal data between jurisdictions. The agreement provides individuals with safeguards and redress mechanisms that protect transfers of personal data from the EU to US companies and to US government agencies.

Ongoing changes to legislative and regulatory frameworks governing AI, cybersecurity and personal data will remain a key focus for technology investors and companies in the year ahead, as courts, regulators and businesses continue to respond and adapt to the constant acceleration of technology development.

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