In August, Gary Atkinson, who runs Algorhythm Holdings, a former karaoke company that now calls itself an AI logistics business, told investors the company had "a strong balance sheet with more than $6 million in cash on the books." The balance sheet in the same release showed just under $5 million in cash the company could spend freely, plus about $3 million in restricted cash it couldn't touch. The release never says how Atkinson got to $6 million. The balance sheet also showed that over the next year, Algorhythm expected to owe about $1.5 million more than it would have on hand. The company might not be able to pay all its bills.
Investors noticed. Algorhythm's stock closed 17% lower that day, according to StockTitan , a site that tracks stock news. Its shares had jumped 450% in February, when the company talked up an AI tool for trucking. On Oct. 7, it announced something new: a process for generating renewable power around the clock.
Investors in the small companies that have rebranded around AI often have no way to check what those companies tell them. CCHH, the Nasdaq-listed company that runs the Malaysian restaurant chain Chicken Claypot, announced in July that one of its subsidiaries had signed a three-year, $50 million deal to maintain data centers in Malaysia, and it kept the customer's name secret under a non-disclosure agreement. The announcement doesn't even make clear how many customers there are. It first says the subsidiary signed with "several strategic clients," then refers to "the undisclosed client." It says management has "deep industry relationships" in data centers, then says the company hopes to "build operating experience, supplier relationships, and client credibility" in the business. It names no staff, no partners, and no past data center work. CCHH's stock has fallen more than 70% since. A shareholder who wants to know whether the deal is real has nothing to go on but the company's word.
In March 2024, the Securities and Exchange Commission (SEC) warned public companies directly about false AI claims. Gurbir Grewal, then the SEC's enforcement director, said that "public issuers making claims about their AI adoption must also remain vigilant about similar misstatements that may be material to individuals' investing decisions." Since then, the SEC has charged at least one company that traded on a stock exchange: the restaurant-technology firm Presto Automation. The SEC let Presto settle in January 2025 without paying a fine, and its annual enforcement report, released in April under Chairman Paul Atkins, mentions AI once, in charges against the founder and former CEO of an AI company called Nate. Shareholders who bought into small companies' sudden AI pivots are, for the most part, on their own.
The plainly false AI claims the SEC has investigated
The SEC goes after what it calls "AI washing" — a firm claiming to use AI it doesn't really have — only when the claims turn out to be plainly false. Its first targets, in March 2024, were investment advisors who told clients they used AI they didn't have. Toronto firm Delphia claimed from 2019 to 2023 that it fed client data into AI and machine learning to pick investments, and the SEC found it had no such capability. "Investment advisors should not mislead the public by saying they are using an AI model when they are not. Such AI washing hurts investors," Gary Gensler, then the SEC's chair, said.
The SEC has gone further with startup founders, accusing them of lying outright about their businesses and using AI to sell the lie. In June 2024, the agency charged Ilit Raz, founder of Joonko, a startup that said it used AI to help companies find job candidates, with defrauding investors of at least $21 million. According to the SEC, Raz claimed more than 100 customers and more than $1 million in revenue, handed investors made-up testimonials, and gave one suspicious investor forged bank statements and contracts. "We allege that Raz engaged in an old school fraud using new school buzzwords like 'artificial intelligence' and 'automation,'" Grewal said.
Chicken Claypot's claims are much harder to test than Raz's. CCHH's own announcement lists the deal's "expected transaction value" among its forward-looking statements — the predictions a company warns could turn out wrong — allowing the company to treat its $50 million data-center deal as something more hopeful, not as money in hand. CCHH hasn't named the customer or reported any work since July. Without either, the SEC has no way to check whether the deal is real.
The SEC leadership's silence on AI washing under Atkins
The SEC's current commissioners want fewer, narrower cases than the commission that warned about AI washing brought. "Over the past year, the Commission has put a stop to regulation by enforcement and recentered its enforcement program on the Commission's core mission," Atkins said in April, adding that the agency had moved its people toward "fraud, market manipulation, and abuses of trust." Mark Uyeda, who ran the agency as acting chairman before Atkins and is now a commissioner, said he supports "the move away from using enforcement as a tool for policymaking, and the return to the Commission's historical norms."
AI is still on the SEC's list of targets, but only as a tool for scams. In February 2025, the SEC created a Cyber and Emerging Technologies Unit of about 30 fraud specialists and lawyers, and put fraud committed using AI and machine learning first among the unit's seven priorities. The announcement never used the term "AI washing." Neither Atkins nor Uyeda mentioned AI in April's enforcement report, which quoted no enforcement director at all. Every warning to public companies about overselling their AI came while Gensler ran the agency.
The SEC staff who still check AI claims inspect money managers and brokers, not restaurant chains listed on the Nasdaq. The agency's Division of Examinations goes through the books of investment advisors, mutual funds, brokers, clearing agencies, and transfer agents. For fiscal 2026, its examiners were told to check whether firms' "representations and disclosures fairly reflect operations and controls" on AI, according to a summary by the accounting firm Baker Tilly. In other words, examiners check whether what a fund manager tells clients about its technology matches what it actually does, and CCHH and Algorhythm aren't the kind of company they visit.
The small-company shareholders left to protect themselves
That doesn't mean investors are blind to what's going on. Shareholders have sued over AI claims more than over any other hot topic, filing 16 federal class-action lawsuits in 2025 alone, according to Cornerstone Research , which tracks securities lawsuits with Stanford Law School. The companies they targeted lost about $1.6 trillion in stock market value between them.
But the suits against big companies may thin out. Joseph Grundfest, a former SEC commissioner who taught law at Stanford, said in January that "private litigation sometimes rides on SEC enforcement coattails. So, if the SEC sues fewer issuers, those coattails are shorter, and fewer public companies will experience a 'me-too' private litigation effect."
That leaves small investors with the SEC's own advice, which is to read a company's filings. In January 2024, the agency's investor education office, along with the state securities regulators' group NASAA and the brokerage watchdog FINRA, warned that false claims about what a public company's AI products can do could be a sign of a pump-and-dump, a scheme in which promoters hype a stock and sell their own shares before the price falls. The alert said microcap stocks, the shares of the smallest companies, are especially vulnerable, and told investors to read companies' filings and compare them with rivals'.
The shareholders who read Algorhythm's quarterly report to the SEC in August, as the alert advises, learned that the former karaoke company's cash wouldn't last another year and that it might not stay in business. Atkinson's press release that month called the balance sheet strong and mentioned neither warning. With the SEC's leadership silent on companies that oversell their AI, a small company's own filings may be the first place its shareholders find out what its CEO left out.
