California’s “Transparency in Frontier Artificial Intelligence Act” Enacted: What It Means for AI Startups

On September 29, 2025, California Governor Gavin Newsom signed Senate Bill 53 — the Transparency in Frontier Artificial Intelligence Act (TFAIA) — into law. Taking effect on January 1, 2026, the Act marks a milestone in California’s institutionalization of AI safety governance and compliance disclosure, introducing new obligations for AI developers on transparency, risk management, and employee protections.

For assistance in developing AI compliance frameworks, reviewing contractual obligations, or aligning internal policies with the TFAIA, please contact ILS Partner, Fiona Xu, at contact@consultils.com. Our attorneys advise startups on risk management, policy design, and reporting strategies to help build transparent, secure, and sustainable AI practices ahead of the 2026 implementation.

Core Framework

The TFAIA applies to “Frontier Developers,” defined as companies that train or initiate the training of frontier models exceeding 10²⁶ FLOPs (floating-point operations). Developers with annual consolidated revenues above $500 million are classified as “Large Frontier Developers.” Key compliance obligations include:

• AI Safety Frameworks: Large developers must establish and publish AI safety frameworks outlining risk assessment standards, catastrophic risk mitigation, third-party evaluation procedures, cybersecurity safeguards for model weights, incident response plans, and internal accountability mechanisms.

• Transparency Reports: Before deployment, all frontier developers must publish reports detailing model functions, use limitations, and contact information. Large developers must also disclose their catastrophic risk assessment process and third-party evaluations.

• Risk & Incident Reporting: Large developers must submit quarterly risk summaries to the California Office of Emergency Services. All frontier developers are required to report major safety incidents (such as model weight leaks or loss of control) within 15 days, or 24 hours in emergencies.

• Whistleblower Protections: The Act prohibits retaliation against employees who report violations. Large developers must provide anonymous reporting channels and timely feedback. Each violation may incur civil penalties up to $1 million.

Startup Perspective: Does the TFAIA Affect Me?

The thresholds set by the TFAIA—a computing capacity of 10²⁶ FLOPs (comparable to GPT-4’s training scale) and $500 million in annual revenue—are high, placing most startups outside the definitions of “frontier” or “large” developers. As a result, they are not immediately subject to direct compliance obligations. However, this does not mean startups can disregard the Act. In many business contexts, startups are likely to be indirectly affected by the TFAIA through contractual, operational, or investment-related channels.

Typical TFAIA Flow-Down Obligations in Supplier Agreements

Major model providers such as OpenAI, Anthropic, Google, and Meta, in fulfilling their own compliance obligations under the TFAIA, are likely to incorporate specific provisions into their API agreements and model licensing contracts, including:

• Requiring users to cooperate with the provider’s risk assessments or incident reporting procedures;

• Restricting or prohibiting the use of models in high-risk contexts such as critical infrastructure, law enforcement, or medical decision-making;

• Mandating that users share usage data or submit to compliance audits conducted by the provider;

• Reserving the right to unilaterally suspend or terminate services at any time.

Startups that build their products or services on these providers’ AI models will therefore be indirectly bound by the TFAIA-related obligations flowing down through such contracts.

Rapid Growth in Compute Capacity Approaching the Threshold

Startups that are currently training—or planning to train—models approaching GPT-4-level scale, deploying large cloud-based GPU clusters, or expanding compute investment following significant fundraising may soon reach or exceed the 10²⁶ FLOPs threshold set by the TFAIA. After 2027, if the California Department of Technology lowers this threshold, startups nearing the TFAIA benchmark could become subject to regulatory oversight.

Investment, M&A, and Procurement Requirements

Even without meeting the TFAIA thresholds, startups may still be required to demonstrate AI safety and governance capabilities during business transactions. Common examples include:

• Investors requesting disclosure of AI risk management measures during fundraising or M&A due diligence;

• Government agencies requiring proof of AI governance compliance when startups apply for public contracts or programs;

• Corporate clients—especially those in regulated sectors such as finance and healthcare—requesting formal AI governance documentation as a condition for collaboration.

Preparing for Gradual Compliance Pressure

In summary, the TFAIA will not immediately impose direct compliance obligations on most startups. However, as regulatory thresholds evolve and contractual obligations flow downstream, compliance pressures are expected to expand progressively. To stay ahead of potential risks, startups should consider the following actions:

• Determine Applicability: Track and document key metrics such as model training compute and cloud usage to assess proximity to the 10²⁶ FLOPs threshold.

• Review Upstream Contracts: Examine API, model licensing, and cloud service agreements for clauses related to compliance cooperation or safety incident reporting to avoid hidden flow-down obligations.

• Adopt a Simplified Compliance Framework: Even if not directly regulated, consider developing a lightweight AI governance plan and transparency report to enhance credibility with partners and investors.

• Update Employee Handbooks and Whistleblower Policies: California’s general whistleblower protection laws apply broadly, including to startups below the TFAIA threshold. Ensure internal policies align with these requirements.

• Monitor Post-2027 Threshold Adjustments: The California Department of Technology will periodically reassess definitions and thresholds, potentially expanding coverage to a wider group of developers.

The Transparency in Frontier Artificial Intelligence Act signals California’s formal entry into AI regulation. While most startups remain outside the immediate scope, its influence will extend through supply chains, contracts, and industry standards. Establishing a proactive compliance framework will not only mitigate regulatory risks but also enhance trust among investors, partners, and clients.

For assistance in developing AI compliance frameworks, reviewing contractual obligations, or aligning internal policies with the TFAIA, please contact ILS Partner, Fiona Xu, at contact@consultils.com. Our attorneys advise startups on risk management, policy design, and reporting strategies to help build transparent, secure, and sustainable AI practices ahead of the 2026 implementation.

Disclaimer: The materials provided on this website are for general informational purposes only and do not, and are not intended to, constitute legal advice. You should not act or refrain from acting based on any information provided here. Please consult with your own legal counsel regarding your specific situation and legal questions.

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As Partner and Head of Transactions at ILS, Fiona delivers professional legal and strategic support to tech companies—with a focus on AI, medical devices, and fintech. Beyond full-spectrum technology law, she specializes in export control and compliance: supporting tech firms at all growth stages, aiding startups in scaling operations, and helping mature enterprises address regulatory challenges.

Previously, Fiona gained hands-on experience building legal frameworks from scratch. She advised unicorn companies on global expansion and regulatory hurdles, developing deep insight into clients’ growth challenges. Combining legal expertise with commercial judgment, she helps clients establish sustainable legal processes and provides clear guidance to advance their business.

Email:  contact@consultils.com | Phone: 626-344-8949