Financing and Debt Issuance for Data Center Developers: Insights from Womble Attorneys
Data center developers face a myriad of challenges when it comes to financing and debt issuance. In this blog post, Womble Of Counsel Barlow Keener delves into the intricacies of these topics with Womble Of Counsel David Beckstead and Womble Of Counsel Art Howson. The conversation covers essential aspects such as project finance models, revenue streams, and risk management. This comprehensive discussion aims to provide valuable insights for data center developers looking to enhance their financial strategies.
Barlow Keener: David, what are the primary considerations for data center developers when it comes to debt financing?
David Beckstead: When considering debt financing for data centers, it is crucial to understand that lenders are primarily interested in the project’s revenue streams and risk profile. They look for an acceptable return given the risk involved, and this includes examining co-location agreements, tenancy agreements, and the overall financial model. Lenders scrutinize the project’s utility supply, including power and water, and the potential impact of delays or downtime on revenue. Additionally, lenders are interested in the project’s location, proximity to power and water infrastructure, and the availability of fiber cables.
Barlow Keener: How do lenders assess the risk associated with data center projects?
David Beckstead: Lenders assess risk by evaluating various factors such as the project’s revenue streams, the creditworthiness of tenants, and the terms of service level agreements. Lenders are particularly interested in the service level agreements (“SLAs”), which outline minimum downtime and construction delay provisions.
Barlow Keener: Can you explain the concept of limited recourse financing in the context of data centers?
David Beckstead: Limited recourse financing means that the data center project’s assets are used to secure the lending, and the revenue streams are what lenders rely on for repayment. This model is common in project finance and is particularly relevant for data centers due to their unique infrastructure requirements.
Barlow Keener: What role do green loan principles play in data center financing?
David Beckstead: Green loan principles, such as those issued by Loan Market Association (“LMA”), the Asia Pacific Loan Market Association (“APLMA”), and the Loan Syndications and Trading Association (“LSTA”), are increasingly important in data center financing. These principles require data center operators to maintain certain energy and environmental design standards, which can make the project more attractive to lenders. Data center operators are expected to adhere to standards such as LEED certification, which focuses on energy efficiency and environmental sustainability.
Barlow Keener: Moving on beyond green loan principles, Art, how do lenders approach the construction phase of data center projects?
Art Howson: During the construction phase, lenders often require completion guarantees and financial support from sponsors, including minimum equity contribution requirements for the project. From a due diligence perspective, they typically review the project construction schedule closely in comparison with terms of the project’s revenue contracts, and structure the loan documents to mitigate the risk of potential delays or cost overruns.. Lenders may also require reserve to maintain funds on deposit to cover loan payments or other project costs.
Barlow Keener: Art, what are the key elements of a co-location agreement that lenders focus on?
Art Howson: Lenders focus on the terms of the data center’s revenue contracts, including the length of the lease, early termination risks, and the creditworthiness of tenants. They typically seek the ability to cure defaults under key project contracts, to protect their interests in case of default and ensure that the project’s revenue stream remains intact. And they will want to confirm that the tenancy agreements can be assigned to a new project owner if necessary, given the importance of those contracts as collateral for the loan.
Barlow Keener: How do lenders evaluate the supply of utilities for data center projects?
David Beckstead: Lenders evaluate the supply of utilities by examining the project’s power and water infrastructure. Lenders to data centers today are more than ever particularly interested in how power is secured, whether through dedicated power purchase agreements (“PPAs”) or other arrangements, as this is a critical factor for data center operations. Lenders will also assess the project’s proximity to power plants and water sources to ensure reliable utility supply.
Barlow Keener: Art, what are the common risk allocation strategies in data center financing?
Art Howson: Common risk allocation strategies include limitations on the amount of debt that can be advanced, in relation to equity contributions or to the projected value of the project. Lenders may also require the project to have payment and performance bonds in place with the key construction contractors and equipment suppliers, to mitigate risks outside of the borrower’s direct control.
Barlow Keener: In conclusion, financing and debt issuance for data center developers require a thorough understanding of various financial models, risk assessment strategies, and contractual terms. By focusing on revenue streams, utility supply, and green loan principles, data center developers can enhance their financial strategies and secure the necessary funding for their projects. The insights provided by Womble Of Counsel David Beckstead and Womble Of Counsel Art Howson offer valuable guidance for navigating the complexities of data center financing. As the data center industry continues to evolve, staying informed about these critical aspects will be essential for success.
Important Update – Corporate Transparency Act Filing Obligations Reinstated and Mandatory
CTA filings are obligatory again. Most reporting companies have until March 21, 2025 to complete their filings. If you adopted a wait-and-see posture in regard to making your CTA BOIR filings, the wait is unfortunately over.
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Since December 2024, the CTA has been subject to nationwide injunctions (which have prohibited FinCEN’s enforcement of the CTA’s filing deadlines). Such deadlines are divided into two primary parts: the filing deadline for (i) reporting companies that were in existence prior to 1/1/2024 (“Pre-‘24 Companies”) and (ii) reporting companies formed on or after 1/1/2024 (“New Companies”).
Because the last of the injunctions (in Smith v Treasury in the 5th Circuit) has now been put on hold, FinCEN may immediately begin enforcing the CTA filing deadlines again, including for Pre-‘24 Companies.
In response to the Smith v Treasury ruling, FinCEN announced on February 19, 2025 the following:
With the February 18, 2025, decision by the U.S. District Court for the Eastern District of Texas in Smith, et al. v. U.S. Department of the Treasury, et al., 6:24-cv-00336 (E.D. Tex.), beneficial ownership information (BOI) reporting requirements under the Corporate Transparency Act (CTA) are once again back in effect. However, because the Department of the Treasury (Treasury) recognizes that reporting companies may need additional time to comply with their BOI reporting obligations, FinCEN is generally extending the deadline 30 calendar days from February 19, 2025, for most companies.
Notably, in keeping with Treasury’s commitment to reducing regulatory burden on businesses, during this 30-day period FinCEN will assess its options to further modify deadlines, while prioritizing reporting for those entities that pose the most significant national security risks.
FinCEN also intends to initiate a process this year to revise the BOI reporting rule to reduce burden for lower-risk entities, including many U.S. small businesses.
FinCEN then stated specifically with regard to the current CTA reporting deadlines:
For the vast majority of reporting companies, the new deadline to file an initial, updated and/ or corrected BOI report is now March 21, 2025. FinCEN will provide an update before then of any further modification of this deadline, recognizing that reporting companies may need additional time to comply with their BOI reporting obligations once this update is provided.
Reporting companies that were previously given a reporting deadline later than the March 21, 2025 deadline must file their initial BOI report by that later deadline. For example, if a company’s reporting deadline is in April 2025 because it qualifies for certain disaster relief extensions, it should follow the April deadline, not the March deadline.
As indicated in the alert titled “Notice Regarding National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.)”, Plaintiffs in National Small Business United v. Yellen, No. 5:22-cv01448 (N.D. Ala.)—namely, Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024)—are not currently required to report their beneficial ownership information to FinCEN at this time.
As a result:
All Pre-‘24 Companies (entities formed prior to 1/1/2024) are required to complete their initial filing by March 21, 2025. Note that the Pre-’24 Companies originally had a 1/1/2025 filing deadline, prior to the court actions.
All New Companies (entities formed on or after 1/1/2024) are required to complete their initial filing by March 21, 2025.
Additional Information:
Courts: While there are ongoing court proceedings that could impact the CTA in the future, there are no currently applicable injunctions (and no additional court rulings are anticipated that would alter the deadlines above). The injunctions that were recently effective were preliminary injunctions (i.e., they were issued before the courts had ruled on the merits of the cases) and courts, including the U.S. Supreme Court, have indicated that a preliminary injunction is not appropriate in this case. Courts have split as to whether or not they find the CTA to be “constitutional” (or, whether they presume the CTA to be “constitutional” in cases where a finding has not yet been made). To date, multiple courts in the 1st Circuit, 4th Circuit and 9th Circuit have issued rulings favorable to the CTA and its constitutionality, and multiple courts in the 5th Circuit and 11th Circuit have issued rulings against the constitutionality of the CTA.
Administration: While the new Administration has not made public statements regarding its intention for the CTA, and it could always change its tact, it has thus far supported the CTA in CTA related cases through recent court filings and the above FinCEN pronouncement.
Congress: The U.S. House of Representatives, on February 11, 2025, by a vote of 408 – 0, approved a bill to extend the BOIR filing deadline for only Pre-‘24 Companies to January 1, 2026. This bill has not been passed by the Senate, and, as drafted, would only delay a portion of the filings due under the CTA, and would not impact the filing obligations of New Companies.
False Claims Act Liability Based on a DEI Program? Let’s Think It Through.
One of the more attention-grabbing aspects of Executive Order (“EO”) 14173, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” is the specter of False Claims Act (“FCA”) liability for federal contractors based on their Diversity, Equity, and Inclusion (“DEI”) programs. Many workplace DEI programs have been viewed as a complement to federal anti-discrimination law—a tool for reducing the risk of discrimination lawsuits. The new administration, however, views DEI programs as a potential source of discrimination. EO 14173 proclaims that “critical and influential institutions of American society . . . have adopted and actively use dangerous, demeaning, and immoral race- and sex-based preferences under the guise of so-called ‘diversity, equity, and inclusion’ (DEI) or ‘diversity, equity, inclusion, and accessibility’ (DEIA) that can violate the civil-rights laws of this Nation.” To counteract this potential “illegal” use of DEI programs, the Trump administration is leveraging the FCA, a powerful anti-fraud statute, to enforce its policy within the federal government contractor community.
We discuss below the framework of the FCA, how it might apply to federal contractor DEI programs under the administration’s orders, and potential hurdles the government may face in pursuing FCA claims based on a contractor’s allegedly illegal DEI program. We recommend steps contractors can take to mitigate potential FCA risks when evaluating their own DEI programs.
How Does the False Claims Act Work?
The FCA creates civil monetary liability for those who submit to the government (1) a false or misleading claim or statement, (2) while knowing that the claim was false, and where (3) the false claim or statement is material to the government’s payment decision.
The courts have recognized a number of circumstances that can give rise to FCA liability. As relevant to EO 14173, the government might assert that a contractor submits a “legally false” claim when it knowingly fails to comply with a contractual or legal requirement, even if the contractor otherwise performs the services or provides the goods that are the subject of the contract. This theory posits that the contractor “impliedly certifies” its compliance with a material term or requirement at the time it submits its claim for payment.[1]
The consequences of FCA liability can be significant. The statute allows the government to recover treble damages (i.e., three times the amount that the government was harmed), plus civil penalties that attach to each false or fraudulent claim.[2] Government contractors also may find themselves facing severe collateral consequences, as a finding of FCA liability often leads to suspension and debarment proceedings, which threaten the contractor’s eligibility for future federal awards.
One of the unique features of the FCA is its whistleblower provisions, which allow a private person (or company) to file an FCA lawsuit on behalf of the government. Such qui tam lawsuits are filed in court, but under seal—i.e., not available to the public—to allow the government to investigate the claims and decide whether to participate in the whistleblower’s claims. The FCA provides strong financial incentives to would-be qui tam plaintiffs, by allowing them to share in any recovery to the government, and to recover their attorney’s fees and costs incurred in bringing the action.
Whistleblower-initiated FCA activity is on the increase. Recent data shows that nearly 1,000 qui tam actions were filed in fiscal year 2024. Further, of the $2.9 billion that the government recovered through the FCA in 2024, more than $2.4 billion resulted from qui tam cases. Whistleblowers received more than $400 million through these recoveries.
How Might Federal Contractor DEI Programs Give Rise to FCA Liability?
EO 14173 requires every government agency to include in every contract or grant award a provision confirming that the contractor understands and agrees that “its compliance in all respects with all applicable Federal anti-discrimination laws is material to the government’s payment decisions,” for purposes of the FCA. Those agreements must also require contractors and grantees to certify that “it does not operate any programs promoting DEI that violate any applicable federal anti-discrimination laws.” By citing the FCA and specifically invoking the element of materiality requiring certification, EO 14173 signals that the administration intends to enforce its policies through the FCA.
Once a contractor provides the certification envisioned by EO 14173,[3] the potential exists for the government or a whistleblower to initiate an FCA action on the theory that the contractor’s DEI program violates federal anti-discrimination law. Some government contractors may think they should immediately abolish their DEI programs in order to neutralize the potential risk of costly FCA investigations and litigation. But as we explain below, actually winning an FCA case on the basis that the contractor’s DEI program violates applicable federal law will not be slam dunk.
What Are Some Potential Hurdles to Proving an FCA Violation Based on a DEI Program?
The plaintiff, whether the government or a whistleblower, bears the burden of proving each element of the alleged FCA violation. The elements of falsity, scienter, and materiality could each face obstacles of proof in establishing liability based on allegedly improper DEI program.
Falsity. To establish falsity, the government must show that the defendant contractor submitted a claim for payment to the government without disclosing that its DEI program violated federal anti-discrimination laws. The government may try to argue that some portion of the contractor’s DEI program is manifestly unlawful, but federal courts are divided as to whether contemporaneous, good faith differences in interpretation related to a disputed legal question (e.g., what constitutes “illegal DEI”) are “false” under the FCA. A number of courts require that an alleged statement or “implied certification” is objectively false.
Adding to the uncertainty here, neither the EO nor the versions of the contractor certification proposed so far define key terms such as “promoting,” “DEI,” and “illegal DEI.” The administration’s apparent view that certain DEI programs violate anti-discrimination statutes, such as Title VII of the Civil Rights Act, may not receive the deference that the courts once extended to the Executive Branch.[4]
Scienter. A false statement or certification is not actionable under the FCA unless the contractor “knew”—or at a minimum, recklessly disregarded—the falsity at the time its claim was submitted. A contractor’s honestly held, good faith belief in the truthfulness of its certification is a strong defense to liability.[5] Where contractors are required already to comply with federal anti-discrimination laws, it seems likely that they hold a good faith belief that their DEI programs are consistent with, and not contrary, to those laws. We expect that the government will face significant hurdles in proving that contractors “knowingly” engaged in “illegal” DEI programs.
Materiality. While EO 14173 expressly invokes materiality language in its anticipated contract and grant provisions, that alone is insufficient to establish the materiality element under the FCA. Indeed, the Supreme Court has held specifically that a contract provision or regulation requiring compliance as an express condition of payment is not dispositive on materiality.[6] Instead, establishing the materiality element under the FCA requires consideration of a variety of factors, including whether the government continued to pay the contractor’s claims in full, knowing that there were questions as to the legality of the contractor’s DEI program. Given the demanding standard required to establish materiality, contractors should not feel pressured to readily concede this element merely because the of a DEI certification in their contracts.
What Steps Should Federal Contractors Take to Reduce Their Risk?
Despite these likely obstacles to establishing FCA liability, EO 14173 will no doubt engender FCA investigations and whistleblower complaints in the upcoming months. To prepare for the new legal landscape, contractors should take the following precautions.
Conduct a Thorough, Privileged Analysis of All Aspects of the DEI Program
Contractors may think that abolishing their DEI program will erase the FCA risk. However, the government has cautioned that those who try to hide DEI activities by “misleadingly relabeling” them,[7] will still face scrutiny. Accordingly, FCA whistleblowers may be undeterred by the absence of a specific program called DEI, particularly if such an initiative existed previously.
To be clear, even under EO 14173, it is not illegal to have a DEI program. If a contractor has such a program, now is the time to undertake a comprehensive review to ensure that it comports with current anti-discrimination laws. There are several benefits to engaging counsel to conduct this review, even if the contractor believes its DEI program is lawful. First, evaluating the program through the more critical lens of the current administration can identify any aspects that should be amended to mitigate misunderstanding and risk. Second, engaging in such a review can help establish the contractor’s good faith belief in the truthfulness of its DEI certification. Third, the review can allow a contractor to explain to the government, if necessary, the legality and business value of each element of its DEI program.
Conduct a Privileged Assessment of Public-Facing DEI Messaging
Federal contractors also should undertake a privileged review of all public-facing DEI messaging and disclosures. These can appear in various places including on a company’s website, in its SEC filings, in recruiting materials, and on intranet platforms. Again, this evaluation can identify and mitigate the risk that any portion of the DEI program appears unlawful, even if it is not in practice or substance. Changes to descriptions of a company’s DEI program or its commitments to non-discrimination should be made in consultation with counsel and appropriate internal and external stakeholders, to avoid inadvertent legal admissions or the perception that a company has abandoned its previously stated commitment to compliance with the law.
Maintain Real-Time Awareness and Develop a Strategy Regarding the Certification
Agencies already have begun sending their own versions of a DEI certification to contractors as proposed bilateral modifications to existing contracts, often with a demand for a response within just a few days. For new contracts, the government may include the new certification in a portal with other representations and certifications that a contractor must complete in connection with maintaining eligibility or submitting proposals. It is critical to anticipate, identify, and be ready for the moment when a DEI certification becomes applicable to the contractor organization. Contractors should identify the person(s) within their organization likely to receive the certification requests and provide them with instructions and training on how to respond.
We also recommend consulting legal counsel in connection with making any proposed certification. Contractors may be able to present alternative responses to agency requests, rather than immediately agreeing to an ill-defined certification. For instance, the contractor might bring the ambiguities in the certification language to the attention of the Contracting Officer, while contemporaneously memorializing the basis for the contractor’s reasonable interpretation of the ambiguous certification to assist in the defense of a future FCA claim.
Do Not Retaliate Against Employees (or Anyone) Asking Questions About the Legality of the DEI Program
In the coming months, potential whistleblowers may be sizing up whether there is a possibility for an FCA action. In so doing, they may raise questions or concerns about a contractor’s DEI program. The FCA includes anti-retaliation provisions that can expose a company to an employment lawsuit, even if a substantive FCA violation cannot be established. Anticipating how to address questions about the DEI program (and documenting such exchanges) may help avoid potential legal challenges. Contractors should also confirm that employees have multiple, safe avenues to report, and provide managers and human resources professionals with guidance for responding appropriately.
Review and Consider Updates to Internal Company Policies on DEI
Contractors should consider whether to update internal policies to reflect that they contemporaneously reviewed the requirements of EO 14173 and made efforts to comply with its directives. For instance, internal policies could be amended to more clearly state that employment decisions are based on merit and not on protected characteristics. Policies could be developed that expressly disallow race or gender-based quotas, workforce balancing, required composition of hiring panels, diverse slate policies, or DEI training relying on stereotypes. Having recently updated policies that align with the new EO may provide greater protection in the event of a government investigation, particularly if contractors can demonstrate that these new policies are subject to an internal control schedule to test for compliance.
Conclusion
We anticipate the administration will seek to vigorously enforce the requirements of EO 14173. Indeed, the EO contemplates civil compliance investigations of numerous entities ranging from publicly traded corporations to institutions of higher education. Although contractors should remain vigilant about compliance, they should also keep in mind that FCA liability for an allegedly “illegal DEI” program is not a foregone conclusion, even in the face of a certification regarding materiality. The government (or whistleblower) must still establish an FCA violation on the specific facts at issue and likely will face challenges given the many ambiguities in the EO and in the certifications and provisions proposed to date. Even a meritless FCA suit quickly dismissed, though, is something contractors will want to avoid. Thus, it is critical to undertake steps to mitigate the risk of a qui tam action.
[1] The Supreme Court acknowledged the implied false certification theory of FCA liability in Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176 (2016).
[2] 31 U.S.C. § 3729(a)(1).
[3] How the government will include this certification into all federal contracts is not yet clear. Some contractors have begun receiving proposed bilateral contract modifications with certification language (each slightly differently worded). For new contracts, the certification likely will appear on a portal along with other routine government contracts representations and certifications. It is also worth noting that, the ordered DEI certification should be subject to notice and comment rulemaking under the OFPP Act, 41 U.S.C. § 1707; yet the administration has paused rulemaking under a memorandum dated January 20, 2025 titled Regulatory Freeze Pending Review – The White House. Failure to engage in rulemaking could render the proposed DEI certifications unenforceable. See Navajo Ref. Co., L.P. v. United States, 58 Fed. Cl. 200, 209 (2003) (contract clause invalid because no notice and comment process occurred pursuant to the OFPP Act); La Gloria Oil & Gas Co. v. United States, 56 Fed. Cl. 211, 221–22 (2003) (same), abrogated on other grounds by Tesoro Hawaii Corp. v. United States, 405 F.3d 1339 (Fed. Cir. 2005).
[4] See Loper Bright Enterprises v. Raimondo, 603 U.S. 369, 412-13 (2024) (holding that courts should not defer to administrative agencies’ interpretations of statutes that are clear and unambiguous).
[5] See United States ex rel. Schutte v. SuperValu, Inc., 598 U.S.C. 739, 749 (2023) (“The FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonably person may have known or believed.”).
[6] See Universal Health Servs., Inc. v. Escobar, 579 U.S. 176, 190 (2016) (“. . . not every undisclosed violation of an express condition of payment automatically triggers liability. Whether a provision is labeled a condition of payment is relevant to but not dispositive of the materiality inquiry.”).
[7] See, e.g., Ending Radical And Wasteful Government DEI Programs And Preferencing – The White House (Feb. 5, 2025; Dep’t of Justice, Office of Attorney General Memorandum (February 5, 2025).
Corporate Transparency Act’s Reporting Obligations Revived
Once again, Beneficial Ownership Information (BOI) reporting obligations under the Corporate Transparency Act (CTA) have been revived. On February 17, a federal judge lifted the stay he had ordered on January 7 in Smith v. U.S. Department of the Treasury, 6:24-cv-00336 (E.D. Tex.), which had prevented the Government from enforcing the BOI Rule on a nationwide basis.
On February 18, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) released a notice that announced the following key updates:
Unless subject to a later deadline, the new deadline to file an initial, updated and/or corrected BOI report with FinCEN is now March 21, 2025.
Before March 21, 2025, FinCEN may “further modify deadlines” for entities that do not pose significant national security risks. If FinCEN does so, it will provide yet another update “recognizing that reporting companies may need additional time to comply[.]”
Importantly, “FinCEN also intends to initiate a process this year to revise the BOI reporting rule to reduce burden for lower-risk entities, including many U.S. small businesses.” This is the strongest signal yet that the current Administration will seek formal amendments to the BOI Rule, although no details regarding proposed changes have been publicly released.
Businesses and others impacted by the CTA should prepare now to meet the March 21 deadline.
In the meantime, numerous cases challenging the CTA, including Smith, will continue to work their way through the legal process and Congress might take preemptive action. On February 10, the U.S. House of Representatives unanimously passed H.R.736, which would give FinCEN authority to extend the compliance deadline for pre-2024 reporting companies to January 1, 2026. A companion bill in the U.S. Senate. Bills to repeal the CTA remain pending as well.
If You Don’t Know the Numbers, You Don’t Know the Business
Understanding EBITDA and Why It Matters
A business can have the best sales team, the best product, or the best service in the world. But if someone in the business doesn’t understand the finance function, the business is likely to fail.
A fundamental concept used to measure the financial health of a company is EBITDA- earnings before interest, taxes, depreciation, and amortization.
EBITDA, as the acronym suggests, measures a company’s financial performance by excluding the effects of financing decisions (interest), tax obligations, and non-cash expenses like depreciation and amortization. This approach provides a clearer view of a company’s operational profitability. It’s not the only approach for such measuring (EBIT and EBITDAR are examples of competing approaches) but it is very widely used.
Why Do People Use EBITDA?
Terry Orr, a forensic accountant with HKA, points out that private equity firms favor EBITDA because it helps them quickly assess whether a company will be able to service its debt after an acquisition. Businesses, investors, and analysts utilize EBITDA for several reasons:
Comparability: It allows for an apples-to-apples comparison between companies in the same industry, regardless of how they finance their operations.
Assessing Profitability: EBITDA can indicate a company’s operational performance by removing financing and tax decisions.
Mergers and Acquisitions (M&A): Buyers often consider EBITDA to determine the price they should pay for a company.
The Pitfalls of EBITDA
While EBITDA can be a useful tool, it has its drawbacks:
It’s Not GAAP-Defined: EBITDA is not part of Generally Accepted Accounting Principles (GAAP), meaning companies can adjust how they calculate it. GAAP is the standard endorsed by the US Securities and Exchange Commission (SEC) and serves as the default accounting standard for US-based companies.
It Ignores Key Expenses: Since it excludes debt payments and capital expenditures, EBITDA may present an overly optimistic picture of a company’s financial health.
It Can Be Manipulated: Some companies adjust EBITDA with ‘add-backs’ to make their numbers look better. Attorney Candice Kline emphasizes that when examining ‘adjusted EBITDA,’ it’s important to scrutinize the adjustments, as companies may be adding back one-time expenses in a way that stretches the definition of ‘one-time.’
Real-World Application: The Lemonade Stand Example
To illustrate how EBITDA works, consider two lemonade stands:
Lemonade Stand A is funded entirely by equity.
Lemonade Stand B is financed mostly by debt.
Both have the same revenue and cost of goods sold, but because Stand B has interest expenses on its debt, its net income is lower. However, their EBITDA is the same because EBITDA does not account for interest payments.
Professor Steven Stralser notes that EBITDA reveals how well the business itself is running, but not necessarily how well the owners or investors are doing.
When to Use — and When to Question — EBITDA
Use EBITDA when comparing companies within an industry, analyzing profitability trends, or evaluating a potential acquisition.
Question EBITDA when a company uses it as the sole measure of success, when there are numerous ‘adjustments,’ or when debt and capital expenses are significant aspects of the business model.
Final Thoughts
Understanding EBITDA can make attorneys, accountants, and business professionals more effective advisors to their clients. It’s a useful tool — but like any tool, it needs to be used wisely. EBITDA is just one piece of the puzzle that should always be considered alongside other financial metrics to get the full picture.
To learn more about this topic view MBA Bootcamp / EBITDA and Other Scary Words. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about accounting and finance principles for business owners and investors.
This article was originally published here.
©2025. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
Parked: The Extension of the UK’s Sustainability Disclosure Requirements to Portfolio Managers
On 14 February 2025, the Financial Conduct Authority (the “FCA”) updated its webpage on consultation paper (CP24/8) on extending the sustainability disclosure requirements (“SDR”) and investment labelling regime to portfolio managers. In the update, the FCA confirmed that it no longer intends to do so and will continue to reflect on the feedback received and provide further information in due course.
The FCA had scheduled publishing a policy statement on this in Q2 2025, but has now stalled this, setting out they are continuing to want to ensure the extension of SDR to portfolio management delivers good outcomes for consumers, is practical for firms and supports growth of the sector.
We reported on the consultation paper here: FCA Sustainability Disclosure Requirements Consultation Paper on the Extension to Portfolio Managers now published – Insights – Proskauer Rose LLP.
How to Report “Pig Butchering” Crypto Fraud and Qualify for a Whistleblower Award
2024 Revenue from Pig Butchering Scams Increased 40% Year-over-Year
According to a Chainanlysis report, revenue from pig butchering crypto frauds, also known as relationship investment scams, grew nearly 40% year-over-year (YoY). Additionally, the number of deposits to these scams increased by nearly 210% YoY.
Pig butchering scams exploit dating apps, social media platforms, messaging apps, and even random “wrong number” text messages to target possible victims. Once a fraudster establishes and builds a relationship with their target, they pitch fraudulent investment opportunities in cryptocurrencies, precious metals, or foreign currencies. Victims are then directed to deceptive trading platforms–operated by the same organized criminal gangs–where they convert their funds into cryptocurrency and then send the crypto to the fraudulent trading platforms. These platforms falsely display substantial investment gains, and victims ultimately find themselves unable to withdraw their funds. To make matters worse, the trading platforms often tell the victims that they are required to pay certain fees to access their (fake) investment gains. These “fees” are just another ploy used by the fraudsters to trick victims into sending additional crypto to their fraudulent platforms.
The Chainalysis report, titled Crypto Scam Revenue 2024: Pig Butchering Grows Nearly 40% YoY as Fraud Industry Leverages AI and Increases in Sophistication, found that cryptocurrency scams received at least $9.9 billion on-chain, an amount that may increase as Chainanalysis identifies more illicit addresses. The report noted that “crypto fraud and scams have continued to increase in sophistication, as the fraud ecosystem becomes more professionalized.” It also highlighted that “crypto drainers continued to proliferate and grew across the board — nearly 170% YoY revenue growth, almost 55% YoY increase in deposit size, and 75% YoY growth in number of deposits.”
Whistleblowers Can Help Combat Pig Butchering Crypto Frauds
Whistleblowers can assist the Commodity Futures Trading Commission (CFTC) in combatting these frauds by reporting original information about pig butchering crypto scams to the CFTC Whistleblower Office. The CFTC Whistleblower Reward Program offers monetary awards to whistleblowers whose original information leads to enforcement actions resulting in civil penalties in excess of $1 million. Whistleblowers reporting pig butchering crypto scams can receive CFTC whistleblower awards between 10% and 30% of the total monetary sanctions collected in successful enforcement actions. The largest CFTC whistleblower award to date is $200 million.
How to Report Pig Butchering Scams to the CFTC and Qualify for a Whistleblower Award
A whistleblower providing original information to the CFTC about an investment romance scam may qualify for an award if:
Their original information caused the CFTC to open an investigation, reopen an investigation, or inquire into different conduct as part of a current investigation, and the CFTC brought a successful enforcement action based in whole or in part on conduct that was the subject of the original information; or
The conduct (i.e., the pig butchering crypto scam) was already under examination or investigation, and the whistleblower provided original information to the CFTC that significantly contributed to the success of the enforcement action.
In determining an award percentage of between 10% and 30%, the CFTC considers the particular facts and circumstances of each case. For example, positive factors may include the significance of the information, the level of assistance provided by the whistleblower and the whistleblower’s attorney, and the law enforcement interests at stake.
If represented by counsel, a whistleblower may submit a tip anonymously to the CFTC. In certain circumstances, a whistleblower may remain anonymous, even to the CFTC, until an award determination. However, even at the time of a reward, a whistleblower’s identity is not made available to the public.
To report a pig butchering crypto fraud and qualify for an award under the CFTC Whistleblower Program, the CFTC requires that whistleblowers or their attorneys report the tip online through the CFTC’s Tip, Complaint or Referral Portal or mail/fax a Form TCR to the CFTC Whistleblower Office. Prior to submitting a tip, whistleblowers should consult with an experienced whistleblower attorney and review the CFTC whistleblower rules to, among other things, understand eligibility rules and consider the factors that can significantly increase or decrease the size of a future whistleblower award.
CFTC Partners with Federal Agencies and NGOs to Combat Pig Butchering
The CFTC’s Office of Customer Outreach and Education is partnering with other federal agencies and non-governmental organizations (NGOs) to raise awareness about relationship investment scams targeting Americans through “wrong number” text messages, dating apps, and social media. This effort includes an infographic that identifies the warning signs of pig butchering:
Additionally, the interagency Dating or Defrauding? social media awareness campaign warns Americans to be skeptical of any request from online friends for cryptocurrency, gift cards, wire transfers, or other forms of payment. The campaign provides information about how to recognize relationship investment scams, what to do if you are affected, and why to share the information to warn others.
Australia: Review Recommends No Increases to Wholesale Client Test, Encourages Further Review
The Parliamentary Joint Committee on Corporations and Financial Services (Committee) has been inquiring into the wholesale investor test for offers of securities, and the wholesale client test for financial products and services in the Corporations Act 2001 (Inquiry) (see our previous post). The Committee has now released its report from the Inquiry.
The Inquiry followed on from the Australian Treasury’s Managed Investment Scheme Review (see our previous post) (MIS Review) which sought feedback on whether the wholesale client thresholds remain appropriate given they have not changed since their introduction in 2001, among other matters. Treasury’s findings on the MIS Review were due to be reported to the Government in early 2024 but these have not been publicly released.
The Committee made just two recommendations:
That the government consider establishing a mechanism for periodic review of the operation of the wholesale investor and client tests; and any such mechanism include mandatory requirements for engagement and consultation with Australia’s investment industry; and
That, subject to a period of stakeholder consultation, the government amend the Corporations Act 2001 to remove the subjective elements of the sophisticated investor test and introduce objective criteria relating to the knowledge and experience of the investor.
There was much speculation about the outcome in relation to the wholesale investor/client tests, particularly given that some stakeholders, most notably the Australian Securities and Investments Commission (ASIC), advocated for the thresholds to be substantially increased.
The Committee found that “a case for raising the test thresholds has not been established at this time” and that the current thresholds remain appropriate notwithstanding the greater proportion of people meeting the thresholds.
The Committee said that it was incumbent on ASIC as the chief regulatory body for Australia’s financial system to ensure that its policy recommendations include meaningful consultation with industry stakeholders. In the Inquiry hearings, ASIC acknowledged that it had not consulted industry regarding its submission to increase the thresholds.
The Committee also encouraged the government to consider whether a broader review of the legislation regulating wholesale and retail investors and the financial markets is needed. The Committee suggested that such a review could build on the Australian Law Reform Commission’s Review of the legislative framework for corporations and financial services regulation and the Quality of Advice Review.
The Rules That Apply to Foreign Persons Purchasing Established Homes in Australia are Going to Change on 1 April 2025…. So, You May Need to Act Now
The Hon. Jim Chalmers MP, Federal Treasurer and the Hon. Clare O’Neil MP, Minister for Housing, Minister for Homelessness issued a joint media release on 16 February 2025 titled “Albanese Government clamping down on foreign purchase of established homes and land banking”.
The media release foreshadows changes to the rules that apply when a foreign person buys an established dwelling or undertakes a land development.
Parts of the media release are extracted below:
The Albanese Government will ban foreign investors from buying established homes for at least two years and crack down on foreign land banking.……..This is all about easing pressure on our housing market at the same time as we build more homes.………We’re banning foreign purchases of established dwellings from 1 April 2025, until 31 March 2027. A review will be undertaken to determine whether it should be extended beyond this point.The ban will mean Australians will be able to buy homes that would have otherwise been bought by foreign investors.Until now, foreign investors have generally been barred from buying existing property except in limited circumstances, such as when they come to live here for work or study.From 1 April 2025, foreign investors (including temporary residents and foreign owned companies) will no longer be able to purchase an established dwelling in Australia while the ban is in place unless an exception applies.………We will also bolster the Australian Taxation Office’s (ATO) foreign investment compliance team to enforce the ban and enhance screening of foreign investment proposals relating to residential property by providing $5.7 million over 4 years from 2025–26.This will ensure that the ban and exemptions are complied with, and tough enforcement action is taken for any non‑compliance.………We’re cracking down on land banking by foreign investors to free up land to build more homes more quickly.Foreign investors are subject to development conditions when they acquire vacant land in Australia to ensure that it is put to productive use within reasonable timeframes.………
Here are some initial observations:
The consequences of contravening Australia’s foreign investment laws are serious. The media release raises a number of questions, and the full implications will naturally depend upon the precise wording of the changes.
The media release notes “The ATO and Treasury will publish updated policy guidance prior to the commencement of the changes” (i.e. before 1 April 2025).
The existing rules already tightly limit the classes of foreign buyer who can acquire established homes. Currently this is essentially limited to:
A temporary resident (or their spouse) who is going to use the dwelling as their place of residence while in Australia and who applies for and obtains approval;
A buyer who is planning to redevelop the dwelling where the redevelopment will genuinely increase Australia’s housing stock and who applies for and obtains approval; and
Foreign controlled companies who are planning to purchase an established dwelling to house an Australian based employee and who apply for and obtain approval.
It seems clear the Government is also removing the ability for foreign companies to buy established dwellings to house their Australian based staff. While the Government may allow exceptions as it has flagged in the media release, this detail is yet to be seen.
We query whether there are other alternatives to an outright ban, such as only a ban on housing below a prescribed price threshold (area by area).
It is unclear from the media release if the Government is going to change the rules applicable to holders of an Australian permanent resident visa. But we suspect changes are not proposed for holders of an Australian permanent resident visa.
The message from the media release is that where a foreign person has already acquired or intends to acquire vacant land or an established dwelling for redevelopment, the foreign person should assume there is going to be:
More active monitoring of compliance with conditions (eg vacant residential land approvals require construction of all dwellings to be completed within four years of the date of the notice of approval); and
More rapid application of existing enforcement options.
If you currently have a Foreign Investment Review Board (FIRB) approval, make sure you are in complying with the conditions and seek advice if you are not.
We query whether the Government intends to revisit the rules when a foreign person rents a residential dwelling or whether the foreshadowed changes will just apply to purchases.
If a foreign person is unable to acquire an established dwelling, then that person will need to either acquire a new dwelling or access the rental market. The changes may increase still further the demand for dwellings to rent.
If a foreign person is planning on acquiring an established dwelling, take advice and seriously consider doing so before 1 April 2025.
Foreign Investor Surcharges
All six Australian States impose transfer duty surcharges on acquisitions of residential related property acquired by a foreign person (including a foreign company or trust). Typically, the surcharge duty rate is 7% or 8% and applies in addition transfer duty at general rates.
Further, some States and the Australian Capital Territory also impose surcharge land tax on foreign persons that own residential related property.If foreign buyers are prohibited from acquiring existing homes, this may have some impact on the level of surcharge duty and surcharge land tax revenue that will be collected at a State and Territory level.
Caution on Australian Citizens Buying for Foreign Persons
There are some circumstances in which family members (say, as a spouse or adult child) who are Australian citizens or permanent residents may want to acquire and hold property for family members who are foreign. The intention may be to avoid existing FIRB restrictions as well as the above- mentioned foreign investor surcharges.
Such arrangements are high risk and caution should be exercised.
Typically, such arrangements will create a trust relationship between the “apparent purchaser” (i.e. the Australian citizen) and the “real purchaser” (i.e. the foreign person who provides the money for the purchase).
Most Australian States and Territories now require a purchaser of land to provide a declaration which sets out:
Whether the purchaser is acquiring the land for their own purposes (or on trust for another person); and
If the purchaser is acquiring as trustee for another person, whether the beneficiaries of the trust are foreign.
Further, the duties and land tax legislation in most jurisdictions will apply to such arrangements. For example, section 104T in the Duties Act 1997 (NSW) expressly captures “apparent purchaser arrangements” such as those described above for surcharge purchaser duty purposes.
We note that a written agreement is not required to create a treat relationship. A verbal agreement can suffice.
A purchaser who provides a false declaration and does not disclose they are acquiring and holding a property on trust for a foreign person may commit an offence.
There are also risks for the foreign person on whose behalf the property has been purchased. If there is a break down in the relationship between the parties, it may be difficult for the foreign person to demonstrate that they are the real owner of the property (and the party entitled to the benefit of any rents or sale proceeds).
All tax and legal risks should be fully considered if any such arrangements are contemplated.
How can we Help?
We will continue to monitor changes to the rules that apply to acquisitions of established dwellings by foreign persons in Australia and will provide a further update when the new policy is released.
Combatting Scams in Australia and the United Kingdom
In response to the growing threat of financial scams, the Australian Government has passed the Scams Prevention Framework Bill 2025. The Scams Prevention Framework (SPF) imposes a range of obligations on entities operating within the banking and telecommunications industries as well as digital platform service providers offering social media, paid search engine advertising or direct messaging services (Regulated Entities). In the first article of our scam series, Australia’s Proposed Scams Prevention Framework, we provided an overview of the SPF. In this article, we compare the SPF to the reimbursement rules adopted by the United Kingdom and consider the likely implications of each approach.
UK Model
The United Kingdom is a global leader in the introduction of customer protections against authorised push payment (APP) fraud. A customer-authorised transfer of funds may fall within the definition of an APP scam where:
The customer intended to transfer the funds to a person, but was instead deceived into transferring the funds to a different person; or
The customer transferred funds to another person for what they believed were legitimate purposes, but which were in fact fraudulent.
Reimbursement Requirement
A mandatory reimbursement framework was introduced on 7 October 2024 (the Reimbursement Framework) and applies to the United Kingdom’s payment service providers (PSPs). Under the Reimbursement Framework, PSPs are required to reimburse a customer who has fallen victim to an APP scam. The cost of reimbursement will be shared equally between the customer’s financial provider and the financial provider used by the perpetrator of the scam. However, PSPs will not be liable to reimburse a victim who has been grossly negligent by failing to meet the standard of care that PSPs can expect of their consumers (Consumer Standard of Caution) (discussed below), or who is involved in the fraud. Where the customer is classed as ‘vulnerable’, failure to meet the Consumer Standard of Caution will not exempt the PSP from liability.
Consumer Standard of Caution
The Consumer Standard of Caution exception consists of four key pillars:
Intervention – Consumers should have regard to interventions made by their PSP or a competent national authority such as law enforcement. However, a nonspecific ‘boilerplate’ warning will not be sufficient to shift the risk onto the customer.
Prompt reporting – Consumers, upon suspecting they have fallen victim to an APP scam, should report the matter to their PSP within 13 months of the last authorised payment.
Information sharing – Consumers should respond to reasonable and proportionate requests for information made by their PSP in assessing the reimbursement claim. Any requests for information must be limited to essential matters taking into account the value and complexity of the claim.
Involvement of police – Consumers should consent to their PSP reporting the matter to the police on their behalf. PSPs must consider the circumstances surrounding a customer’s reluctance in reporting their claim to the police before relying on this exception.
Failure to meet one or more of the above pillars will only exempt the PSP from liability where the customer has been grossly negligent. This is a higher standard of negligence than required under the common law and requires the customer to have shown a ‘significant degree of carelessness’.
Vulnerability
A vulnerable customer is someone who, due to their personal circumstances, is especially susceptible to harm. Personal circumstances relevant to determining whether a customer is ‘vulnerable’ include:
Health conditions or illnesses that affect one’s ability to carry out day-to-day tasks;
Life events such as bereavement, job losses or relationship breakdown;
Ability to withstand financial or emotional shocks; and
Knowledge barriers such as language and digital or financial literacy.
The Consumer Standard of Caution is not applicable to vulnerable customers. Accordingly, where the victim has been classified as a vulnerable customer, PSPs cannot avoid liability on the grounds of gross negligence for failing to meet the Consumer Standard of Caution.
Limit on Reimbursement
PSPs will not be required to reimburse amounts above the maximum level of reimbursement, which is currently £415,000 per claim.
Key Distinctions Between the SPF and the UK Model
Financial Burden of Scams
Both the UK and Australian models seek to incentivise entities to adopt policies and procedures aimed at lowering the risk of scams. By requiring PSPs to reimburse scam victims, the UK’s model shifts the economic cost of scams from customers onto PSPs. A similar purpose is achieved under the SPF, which provides for harsh financial penalties for entities that fail to develop and implement appropriate policies to protect customers against scams. However, a significant point of difference is the extent to which these financial burdens benefit victims of scams directly.
Under the UK model, a victim of an APP scam will be able to recover the full amount of their loss (up to the prescribed maximum amount) so long as:
They were not grossly negligent in authorising the payment;
They were not a party to the fraud;
They are not claiming reimbursement fraudulently or dishonestly;
The amount claimed is not the subject of a civil dispute or other civil legal action;
The payment was not made for an unlawful purpose; and
The claim is made within 13 months of the final APP scam payment.
In contrast, there is no indication that any funds paid under Australia’s SPF civil penalty provisions will be directed towards the reimbursement of victims. However, under the Scams Prevention Framework Bill 2025, where a Regulated Entity has failed to comply with its obligations under the SPF and this failure has contributed to a customer’s scam loss, the customer may be able to recover monetary damages from the Regulated Entity.
Possible Effect on Individual Vigilance
The UK’s Reimbursement Framework recognises that PSPs, as opposed to individuals, have greater resources available to combat the threat of scams. However, there is a risk that by passing the economic cost of scams onto PSPs, individuals will become less vigilant. Where an individual fails to make proper inquiries which would have revealed the true nature of the scam, they may still be eligible for reimbursement so long as they have not shown a ‘significant degree of carelessness’. With this safety net, individuals may become complacent about protecting themselves from the threat of scams.
In contrast to the UK model, individuals will continue to bear the burden of unrecoverable scam losses under Australia’s SPF unless a Regulated Entity’s breach of SPF obligations has contributed to the loss. As a result, individuals will continue to have a financial incentive to remain vigilant in protecting themselves against the threat of scams.
Scope of Framework
Australia
The SPF applies to entities across multiple industries, reflecting Australia’s ‘whole of the ecosystem’ approach to scams prevention. Upon introduction, the SPF is intended to apply to banking and telecommunications entities as well as entities providing social media, paid search engine advertising or direct messaging services. It is noted in the explanatory materials that the scope of the SPF is intended to be extended to other industries over time to respond to changes in scam trends.
The purpose of this wider approach is to target the initial point of contact between the perpetrator and victim. For example, a perpetrator may create a social media post purporting to sell fake concert tickets. Successful disruptive actions by the social media provider, such as taking down the post or freezing the perpetrator’s account, may prevent the dissemination of the fake advertisement and potentially reduce the number of individuals who would otherwise fall victim to the scam.
United Kingdom
In contrast, the UK’s Reimbursement Framework only applies to PSPs participating in the Faster Payments Scheme (FPS) that provide Relevant Accounts.
FPS
The FPS is one of eight UK payment systems designated by HM Treasury. According to the Payment Systems Regulator, almost all internet and telephone banking payments in the United Kingdom are now processed via FPS.
Relevant Account
A Relevant Account is an account that:
Is provided to a service user;
Is held in the United Kingdom; and
Can send or receive payments using the FPS,
but excludes accounts provided by credit unions, municipal banks and national savings banks.
Effect of Single-Sector Approach
Due to the United Kingdom’s single-sector approach, different frameworks need to be developed to combat scam activity in other parts of the ecosystem. This disjointed approach may create enforcement issues where entities across multiple sectors fail to implement sufficient procedures to detect and prevent scam activities. Further, it places a disproportionate burden on the banking sector, failing to acknowledge the responsibility of other sectors to protect the community from the growing threat of scams.
Key Takeaways
While both the United Kingdom and Australia have demonstrated a commitment to adopting tough anti-scams policies, they have adopted very different approaches. Time will tell which approach has the largest impact on scam detection and prevention.
The authors would like to thank paralegal Tamsyn Sharpe for her contribution to this legal insight.
The State of the Funding Market for AI Companies: A 2024 – 2025 Outlook
Artificial intelligence (AI) has emerged as an influential technology, driving notable investments across various industries in recent years. In 2024, venture capital (VC) funding for AI companies reached record levels, signaling ongoing interest and optimism in the sector’s potential. Looking ahead, 2025 is anticipated to bring continued innovation, with promising funding opportunities and a growing IPO market for AI-driven businesses.
VC Funding in 2024: A Year of Growth
Global VC investment in AI companies saw remarkable growth in 2024, as funding to AI-related companies exceeded $100 billion, an increase of over 80% from $55.6 billion in 2023. Nearly 33% of all global venture funding was directed to AI companies, making artificial intelligence the leading sector for investments. This marked the highest funding year for the AI sector in the past decade, surpassing even peak global funding levels in 2021. This growth also reflects the increasing adoption of AI technologies across diverse sectors, from healthcare to transportation and more, and the growing confidence of investors in AI’s transformative potential.
Industries Attracting Funding
The surge in global venture capital funding for AI companies in 2024 was driven by diverse industries adopting AI to innovate and solve complex problems. This section explores some of the industries that captured significant investments and highlights their transformative potential.
Generative AI. Generative AI, which includes technologies capable of creating text, code, images, and synthetic data, has experienced a remarkable surge in investment. In 2024, global venture capital funding for generative AI reached approximately $45 billion, nearly doubling from $24 billion in 2023. Late-stage VC deal sizes for GenAI companies have also skyrocketed from $48 million in 2023 to $327 million in 2024. The growing popularity of consumer-facing generative AI programs like Google’s Bard and OpenAI’s ChatGPT has further fueled market expansion, with Bloomberg Intelligence projecting the industry to grow from $40 billion in 2022 to $1.3 trillion over the next decade. As a result, venture capitalists are increasingly focusing on GenAI application companies—businesses that build specialized software using third-party foundation models for consumer or enterprise use. This new wave of AI identifies patterns in input data and generates realistic content that mimics the features of its training data. Models like ChatGPT generate coherent and contextually relevant text, while image-generation tools such as DALL-E create unique visuals from textual descriptions.
Healthcare and Biotechnology: The healthcare and biotechnology industries have seen a significant surge in AI integration, with startups harnessing the power of artificial intelligence for diagnostics, drug discovery, and personalized medicine. In 2024, these AI-driven companies captured a substantial share of venture capital funding. Overall, venture capital investment in healthcare rose to $23 billion, up from $20 billion in 2023, with nearly 30% of the 2024 funding directed toward AI-focused startups. Specifically, biotechnology AI attracted $5.6 billion in investment, underscoring the growing confidence in AI’s ability to revolutionize healthcare solutions. As AI continues to evolve, its impact on diagnostics and personalized treatments is expected to shape the future of patient care, driving innovation across the sector.
Financial Technology: Fintech, short for financial technology, refers to the use of innovative technologies to enhance and automate financial services. It includes areas like digital banking, payments, lending, and investment management, offering more efficient, accessible, and cost-effective solutions for consumers and businesses. In recent years, AI has become an important tool in fintech, helping to improve customer service through chatbots, enhance fraud detection with machine learning algorithms, automate trading, and personalize financial advice. While overall fintech investment in 2024 has dropped to around $118.2 billion, down from $229 billion in 2021, AI in fintech remains a high-growth area, valued at $17 billion in 2024 and projected to reach $70.1 billion by 2033. This reflects a strong and sustained interest in leveraging AI to revolutionize financial services despite broader investment slowdowns in the sector.
Trends for 2025
In 2025, VC investments in AI companies are continuing the momentum from previous years. Global venture funding totaled $26 billion in January 2025, of which AI-related companies garnered $5.7 billion, accounting for 22% of overall funding. However, despite the continued interest in AI investment, the investment strategies in 2025 may evolve from the approaches seen in 2024, as market dynamics shift and investors adapt to new challenges and opportunities.
In 2024, the investment strategy was heavily characterized by aggressive funding and rapid scaling. Investor focus appeared to be on capitalizing on the hype around AI technology, leading to substantial valuations and rapid deal cycles. The strategy was primarily characterized by pure innovation, with VCs eager to back groundbreaking technologies regardless of immediate profitability. This led to significant investments in cutting-edge research and experimental applications. However, this approach often led to inflated valuations.
On the other hand, the investment landscape in 2025 is expected to shift with VCs adopting more disciplined and strategic investment approaches. The focus now appears to be on sustainable growth and profitability. Investors are predicted to become more selective, favoring companies with solid fundamentals and proven business models to navigate economic uncertainties.
Regulatory concerns are also playing an increasingly significant role in shaping VC investment strategies in AI. Governments worldwide are ramping up efforts to regulate AI technologies to address issues such as data privacy, algorithmic bias, and security risks. For instance, in the United States, regulatory scrutiny is also intensifying, with lawmakers proposing new frameworks to ensure transparency and accountability in AI algorithms. This includes discussions about mandating audits of high-risk AI systems and potentially introducing liability rules for AI-generated content. These evolving regulatory landscapes are contributing to market unpredictability, as startups may face heightened compliance burdens and legal uncertainties. As a result, while the enthusiasm for AI investments remains high, the 2025 strategy is marked by increased due diligence and a more calculated approach, reflecting a growing emphasis on navigating complex regulatory landscapes.
Resurgence of Initial Public Offerings (IPOs):
In 2025, the IPO market for AI companies is expected to be a significant area of focus, driven by a combination of strong growth in the sector and favorable market conditions. A major window for the IPO market could be opening. Analysts attribute this rebound to factors such as markets reaching new highs, stabilized interest rates, a strong economy, and a clearer understanding of the new administration’s plans following the recent election. The favorable market environment for these companies is supported by a solid U.S. economy, which is expected to grow by 2.3% in 2025.
Several major AI players are preparing to enter the public markets. One of the most anticipated IPOs is that of Databricks, an AI-driven data analytics platform that has raised nearly $14 billion in funding, most recently at a $62 billion valuation. The company has expressed intentions to go public in 2025, indicating a favorable outlook for the sector. Additionally, companies like CoreWeave, an AI cloud platform based in New Jersey, are expected to follow with their own IPOs later in the year, further fueling the optimism around AI investments. Crunchbase News highlights that there are at least 13 other AI startups with strong IPO potential in 2025. This IPO pipeline is a reflection of the broader momentum within the AI sector.
Despite these positive indicators, economic challenges such as trade tensions, inflationary pressures, and concerns over policy decisions add a layer of complexity to the market. For example, trade tensions could contribute to rising manufacturing costs, which could put pressure on companies that rely on global supply chains. Tariffs could contribute to inflationary pressures, which could dampen consumer spending and overall economic growth. These challenges highlight the need for companies to navigate an evolving landscape where trade policies and inflationary concerns could impact their growth trajectories.
Despite these hurdles, the IPO market remains buoyed by investor confidence, particularly in AI. As AI companies continue to develop new applications across industries, the appetite for public offerings remains strong. The favorable market environment for these companies suggests that AI will be a key focus for investors seeking sustainable growth opportunities in 2025.
Conclusion
The AI funding landscape in 2024 demonstrated the technology’s transformative potential across industries. As we move into 2025, investors and companies alike will need to navigate evolving market dynamics and regulatory landscapes. The IPO market, too, holds promise, provided companies are well-prepared to meet investor expectations surrounding sustainable growth and profitability.
AI and Blockchain – 1+1 =3
Individually, AI and blockchain are among the hottest, most transformative technologies. Collectively, they are incredibly synergistic – hence the 1+1=3 concept in the title. We are seeing more examples of how the two will interact. Over time, the level of interaction will be extensive. Many projects are being developed that bring the power of AI to blockchain applications and vice versa. One of these projects that has garnered significant attention is the Virtuals Protocol. The project launched in October 2024 via integration with Base, an Ethereum layer-2 network. Just recently, the project announced that it is expanding to Solana.
The Virtuals Protocol is a decentralized platform for buying, trading, and creating AI agents. It transforms AI agents into tokenized, revenue-generating assets. By leveraging blockchain technology, Virtuals Protocol enables the creation, co-ownership, and interaction with AI agents, expanding their potential across various applications.
AI agents are software programs that can interact with their environment, collect data, and use the data to perform self-determined tasks to meet predetermined goals. Humans set goals, but an AI agent independently chooses the best actions it needs to perform to achieve those goals. See “What are AI Agents?” for more information.
How Virtuals Protocol Works
The Virtuals Protocol integrates AI agents, blockchain infrastructure, and tokenization to create a scalable, decentralized ecosystem. Here’s a breakdown of how it operates:
Agent Tokenization: AI agents are minted as ERC-20 tokens with fixed supplies, paired with $VIRTUAL in locked liquidity pools. These tokens are deflationary through buyback-and-burn mechanisms.
G.A.M.E Framework: Agents utilize multimodal AI capabilities, such as text generation, speech synthesis, gesture animation, and blockchain interactions. This framework allows agents to adapt in real-time.
Revenue Routing: Agents earn revenue through inference fees, app integrations, or user interactions. The proceeds flow into their on-chain wallets for buybacks or treasury growth.
Memory Synchronization: Agents retain cross-platform memory through a Long-Term Memory Processor, ensuring user-specific, contextual continuity.
Decentralized Validation: Contributions and model updates are governed by a Delegated Proof of Stake (DPoS) system, ensuring agent performance aligns with community standards.
On-Chain Wallets: Each agent operates an ERC-6551 wallet, enabling autonomous transactions, asset management, and financial independence.
What Virtuals Do
The Virtuals Protocol redefines digital engagement across gaming, entertainment, and decentralized economies. By simplifying AI adoption, rewarding contributors, and lowering barriers for non-experts, it creates a scalable ecosystem that delivers value for stakeholders. The platform’s agents collectively hold a valuation of over $850 million at the time of publishing, led by Mentigent and aidog_agent. Ownership of these two tokenized AI agents is fractionalized; each is held by more than 200 owners who receive a share of the revenue generated.
Sample Legal Issues Associated with Virtuals
As with any emerging technology, Virtuals Protocol faces several legal challenges:
Intellectual Property Rights: The creation and use of AI agents raise questions about the ownership and protection of intellectual property. Ensuring that creators and users have clear rights and protections is crucial;
Data Privacy: AI agents collect and process vast amounts of user data, raising concerns about data privacy and security. Robust safeguards are necessary to protect user information;
Liability and Safety Standards: Ensuring the safety and reliability of AI agents is essential. Legal frameworks must address potential liabilities and establish safety standards to protect users; and
Regulatory Compliance: As AI and blockchain technologies evolve, regulatory compliance becomes increasingly complex. Virtuals Protocol must navigate various legal requirements to ensure its operations remain lawful and ethical.
Securities Laws: The tokenization of AI agents as ERC-20 tokens and the fractionalized ownership of high-value AI agents may attract scrutiny under securities laws. If the SEC deems these tokens to be investment contracts under the Howey Test, the project could face enforcement actions, requiring registration. See here for our discussion on the SEC’s gameplan for crypto under Trump.
Consumer Finance Laws: The collection and processing of user data by AI agents could subject the project to data privacy and consumer protection regulations. Furthermore, if promotional efforts are perceived as deceptive or unfair to users or investors, this could lead to enforcement actions under federal or state consumer protection laws. To the extent revenue-sharing models are subject to consumer protection laws, this could trigger requirements for fair and clear disclosures to fractionalized owners.
AI-Specific Regulations: The Federal Trade Commission (FTC) has issued guidance emphasizing the importance of transparency and honesty in the use of AI, and cautioning against deceptive practices such as making misleading claims about AI capabilities or results. Overstating the capabilities or revenue generating potential of AI agents to attract users or investors could lead to increased regulatory scrutiny and enforcement. Proposed federal legislation, such as the Algorithmic Accountability Act, would require projects like Virtuals to assess the impacts of bias and discrimination on automated decision-making systems, including AI. AI agents may require audits for bias, transparency, and accountability, particularly given their use in user interactions and decision-making.
Despite the novel legal issues Virtuals Protocol presents, the project represents an exciting and significant advancement in the integration of AI and blockchain technologies. By transforming AI agents into tokenized assets, it creates new opportunities for digital engagement and revenue generation. However, addressing the associated legal issues is essential to ensure user trust and the platform’s sustainable growth.