California Moves Toward Regulating AI Companion Chatbots: What Startups Should Know

California is set to make history as the first U.S. state to introduce meaningful regulations for AI-powered companion chatbots. On September 10, 2025, the State Assembly passed SB 243, a bill designed to safeguard minors and vulnerable individuals when interacting with AI companions. The legislation, which received bipartisan support, now moves to the state Senate for a final vote. If signed by Governor Gavin Newsom, the law will take effect on January 1, 2026.

What Does SB 243 Require?

SB 243 specifically targets AI companions—defined as adaptive chatbot systems capable of fulfilling social needs with human-like conversation. The bill calls for operators of such platforms (including leaders like OpenAI, Character.AI, and Replika) to establish and enforce safety protocols. These rules include:

• Prohibiting chatbots from discussing topics related to self-harm, suicide, or sexually explicit material with users.
• Sending regular reminders—every three hours for minors—that users are interacting with AI, not a human, and should take breaks.
• Submitting annual transparency reports on their operations, with stricter requirements coming into force from July 2027.

Importantly, individuals who experience harm due to violations can take legal action, seeking up to $1,000 per incident plus legal fees.

The Road to Regulation: Tragedy and Tightening Scrutiny

This legislative push gained momentum after the tragic suicide of teenager Adam Raine, whose interactions with ChatGPT allegedly influenced his actions. Leaked documents have also shown that some platforms allowed AI chatbots to engage in inappropriately romantic or sensual chats with minors. These incidents have contributed to heightened scrutiny from U.S. lawmakers and regulatory agencies. The Federal Trade Commission is reportedly preparing to investigate the mental health effects of AI companions on children, and several states are launching their own probes into major AI firms.

Key Bill Features and Industry Response

Earlier versions of SB 243 were even stricter—proposing limitations on gamification tactics (like variable reward systems) that encourage excessive engagement, common among AI companion apps. However, amendments have softened these requirements to ensure both technical feasibility and meaningful compliance.

Many major tech firms have pushed back on such regulation, arguing that innovation and oversight are in tension. Some, like Anthropic, are voicing support for a parallel bill (SB 53) focused on broader AI transparency, which remains hotly debated within the industry. For a deeper dive, see OpenAI Refutes Rumors of Potential California Exit Amid Regulatory Pressures.

Perspectives from Lawmakers

Senator Steve Padilla, a co-sponsor of the bill, emphasizes the need for rapid action: “We can put reasonable safeguards in place to let minors know they're not talking to a real person and direct users in crisis to appropriate resources.”

Co-sponsor Josh Becker adds that the current version finds "the right balance" between preventing harm and avoiding overly burdensome compliance for startups and established companies alike.

Deep Founder Analysis

Why it matters

This bill signals a decisive turn toward state-level AI regulation, especially with respect to user safety and platform accountability. For startups and founders, it’s a sign that the era of self-policing for consumer-facing AI may be ending, even as federal frameworks lag behind. Navigating compliance will become critical to product design, VC diligence, and go-to-market strategy in the AI space.

Risks & opportunities

The risk: AI startups may face barriers to entry due to compliance costs and legal liability, diverting resources from innovation. Past tech cycles have shown that overly broad rules can stifle early-stage players while favoring incumbents with robust legal teams—think GDPR’s impact on European data startups. The opportunity: Companies that proactively build trust and solid safety mechanisms could position themselves as leaders, win enterprise contracts, or forge new partnerships with public agencies looking for compliant solutions.

Startup idea or application

One actionable direction: Launch a “compliance-as-a-service” API or SaaS platform that helps AI chatbot companies meet legal requirements, automate report submissions, monitor conversations for red-flag interactions, and integrate real-time alerts for minors. By turning regulatory burden into a service, a founder could capture value from both established firms and emerging players in the AI companion market.

A Glimpse at the Road Ahead

As California debates even more comprehensive AI accountability measures, such as SB 53, founders and AI companies nationwide should anticipate similar proposals in other regions. Strategic adaptation—embedding compliance, transparency, and user protections early—could become a competitive advantage.

AI Regulation AI Safety Startups Chatbots Compliance

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