OpenAI Considers Corporate Restructure Amid Valuation Surge and Ethical Concerns

OpenAI may have exceeded the limits of its split corporate structure, experts say

The artificial intelligence maker OpenAI may face a costly and inconvenient reckoning with its nonprofit origins even as its valuation recently exploded to $157 billion. Nonprofit tax experts have been closely watching OpenAI, the maker of ChatGPT, since last November when its board ousted and rehired CEO Sam Altman. Now, some believe the company may have reached -- or exceeded -- the limits of its corporate structure, under which it is organized as a nonprofit whose mission is to develop artificial intelligence to benefit "all of humanity" but with for-profit subsidiaries under its control. Jill Horwitz, a professor in law and medicine at UCLA School of Law who has studied OpenAI, said that when two sides of a joint venture between a nonprofit and a for-profit come into conflict, the charitable purpose must always win out. "It's the job of the board first, and then the regulators and the court, to ensure that the promise that was made to the public to pursue the charitable interest is kept," she said. Altman recently confirmed that OpenAI is considering a corporate restructure but did not offer any specifics. A source told The Associated Press, however, that the company is looking at the possibility of turning OpenAI into a public benefit corporation. No final decision has been made by the board and the timing of the shift hasn't been determined, the source said. In the event the nonprofit loses control of its subsidiaries, some experts think OpenAI may have to pay for the interests and assets that had belonged to the nonprofit. So far, most observers agree OpenAI has carefully orchestrated its relationships between its nonprofit and its various other corporate entities to try to avoid that. However, they also see OpenAI as ripe for scrutiny from regulators, including the Internal Revenue Service and state attorneys general in Delaware, where its incorporated, and in California, where it operates. Bret Taylor, chair of the OpenAI nonprofit's board, said in a statement that the board was focused on fulfilling its fiduciary obligation. "Any potential restructuring would ensure the nonprofit continues to exist and thrive, and receives full value for its current stake in the OpenAI for-profit with an enhanced ability to pursue its mission," he said. Here are the main questions nonprofit experts have: Tax-exempt nonprofits sometimes decide to change their status. That requires what the IRS calls a conversion. Tax law requires money or assets donated to a tax-exempt organization to remain within the charitable sector. If the initial organization becomes a for-profit, generally, a conversion is needed where the for-profit pays the fair market value of the assets to another charitable organization. Even if the nonprofit OpenAI continues to exist in some way, some experts argue it would have to be paid fair market value for any assets that get transferred to its for-profit subsidiaries. In OpenAI's case, there are many questions: What assets belong to its nonprofit? What is the value of those assets? Do they include intellectual property, patents, commercial products and licenses? Also, what is the value of giving up control of the for-profit subsidiaries? If OpenAI were to diminish the control that its nonprofit has over its other business entities, a regulator may require answers to those questions. Any change to OpenAI's structure will require it to navigate the laws governing tax-exempt organizations. Andrew Steinberg, counsel at Venable LLP and a member of the American Bar Association's nonprofit organizations committee, said it would be an "extraordinary" transaction to change the structure of corporate subsidiaries of a tax-exempt nonprofit. "It would be a complex, involved process with numerous different legal and regulatory considerations to work through," he said. "But it's not impossible." To be granted tax-exempt status, OpenAI had to apply to the IRS and explain its charitable purpose. OpenAI provided The Associated Press a copy of that September 2016 application, which shows how significantly the organization's plans for its technology and structure have changed. OpenAI spokesperson Liz Bourgeois said in an email that the organization's missions and goals remained constant, though the way it's carried out its mission has evolved alongside advances in technology. When OpenAI incorporated as a nonprofit in Delaware, it wrote that its purpose was, "to provide funding for research, development and distribution of technology related to artificial intelligence." In tax filings, it's also described its mission as building, "general-purpose artificial intelligence (AI) that safely benefits humanity, unconstrained by a need to generate financial return." Steinberg said there is no problem with the organization's plans changing as long as it reported that information on its annual tax returns, which it has. But some observers, including Elon Musk, who was a board member and early supporter of OpenAI and has sued the organization, are skeptical that it has been faithful to its mission. The "godfather of AI" Geoffrey Hinton, who was co-awarded the Nobel Prize in physics on Tuesday, has also expressed concern about OpenAI's evolution, openly boasting that one of his former students, Ilya Sutskever, who went on to co-found the organization, helped oust Altman as CEO before bringing him back. "OpenAI was set up with a big emphasis on safety. Its primary objective was to develop artificial general intelligence and ensure that it was safe," Hinton said, adding that "over time, it turned out that Sam Altman was much less concerned with safety than with profits. And I think that's unfortunate." Sutskever, who led a team focused on AI safety at OpenAI, left the organization in May and has started his own AI company. OpenAI for its part says it is proud of its safety record. Ultimately, this question returns to the board of OpenAI's nonprofit, and the extent to which it is acting to further the organization's charitable mission. Steinberg said that any regulators looking at a nonprofit board's decision will be most interested in the process through which it arrived at that decision, not necessarily whether it reached the best decision. He said regulators, "will often defer to the business judgment of members of the board as long as the transactions don't involve conflict of interests for any of the board members. They don't stand to gain financially from the transaction." Whether any board members were to benefit financially from any change in OpenAI's structure could also be of interest to nonprofit regulators. In response to questions about if Altman might be given equity in the for-profit subsidiary in any potential restructuring, OpenAI board chair Taylor said in a statement, "The board has had discussions about whether it would be beneficial to the company and our mission to have Sam be compensated with equity, but no specific figures have been discussed nor have any decisions been made."

Documents show OpenAI's long journey from nonprofit to $157B valued company

Back in 2016, a scientific research organization incorporated in Delaware and based in Mountain View, California, applied to be recognized as a tax-exempt charitable organization by the Internal Revenue Services. Called OpenAI, the nonprofit told the IRS its goal was to "advance digital intelligence in the way that is most likely to benefit humanity as a whole, unconstrained by a need to generate financial return." Its assets included a $10 million loan from one of its four founding directors and now CEO, Sam Altman. The application, which nonprofits are required to disclose and which OpenAI provided to The Associated Press, offers a view back in time to the origins of the artificial intelligence giant that has since grown to include a for-profit subsidiary recently valued at $157 billion by investors. It's one measure of the vast distance OpenAI -- and the technology that it researches and develops -- has traveled in under a decade. In the application, OpenAI indicated it did not plan to enter into any joint ventures with for-profit organizations, which it has since done. It also said it did "not plan to play any role in developing commercial products or equipment," and promised to make its research freely available to the public. A spokesperson for OpenAI, Liz Bourgeois, said in an email that the organization's missions and goals have remained constant, though the way it's carried out its mission has evolved alongside advances in technology. Attorneys who specialize in advising nonprofits have been watching OpenAI's meteoric rise and its changing structure closely. Some wonder if its size and the scale of its current ambitions have reached or exceeded the limits of how nonprofits and for-profits may interact. They also wonder the extent to which its primary activities advance its charitable mission, which it must, and whether some may privately benefit from its work, which is prohibited. In general, nonprofit experts agree that OpenAI has gone to great lengths to arrange its corporate structure to comply with the rules that govern nonprofit organizations. OpenAI's application to the IRS appears typical, said Andrew Steinberg, counsel at Venable LLP and a member of the American Bar Association's nonprofit organizations committee. If the organization's plans and structure changed, it would need to report that information on its annual tax returns, Steinberg said, which it has. "At the time that the IRS reviewed the application, there wasn't information that that corporate structure that exists today and the investment structure that they pursued was what they had in mind," he said. "And that's okay because that may have developed later." Here are some highlights from the application: At inception, OpenAI's research plans look quaint in light of the race to develop AI that was in part set off by its release of ChatGPT in 2022. OpenAI told the IRS it planned to train an AI agent to solve a wide variety of games. It aimed to build a robot to perform housework and to develop a technology that could "follow complex instructions in natural language." Today, its products, which include text-to-image generators and chatbots that can detect emotion and write code, far exceed those technical thresholds. The nonprofit OpenAI indicated on the application form that it had no plans to enter into joint ventures with for-profit entities. It also wrote, "OpenAI does not plan to play any role in developing commercial products or equipment. It intends to make its research freely available to the public on a nondiscriminatory basis." OpenAI spokesperson Bourgeois said the organization believes the best way to accomplish its mission is to develop products that help people use AI to solve problems, including many products it offers for free. But they also believe developing commercial partnerships has helped further their mission, she said. OpenAI reported to the IRS in 2016 that regularly sharing its research "with the general public is central to the mission of OpenAI. OpenAI will regularly release its research results on its website and share software it has developed with the world under open source software licenses." It also wrote it "intends to retain the ownership of any intellectual property it develops." The value of that intellectual property and whether it belongs to the nonprofit or for-profit subsidiary could become important questions if OpenAI decides to alter its corporate structure, as Altman confirmed in September it was considering. The Associated Press and OpenAI have a licensing and technology agreement that allows OpenAI access to part of AP's text archives. Associated Press coverage of philanthropy and nonprofits receives support through the AP's collaboration with The Conversation US, with funding from Lilly Endowment Inc. The AP is solely responsible for this content. For all of AP's philanthropy coverage, visit https://apnews.com/hub/philanthropy.

Changing OpenAI's nonprofit structure would raise questions about its future

The artificial intelligence maker OpenAI may face a costly and inconvenient reckoning with its nonprofit origins even as its valuation recently exploded to $157 billion. Nonprofit tax experts have been closely watching OpenAI, the maker of ChatGPT, since last November when its board ousted and rehired CEO Sam Altman. Now, some believe the company may have reached or exceeded the limits of its corporate structure, under which it is organized as a nonprofit whose mission is to develop artificial intelligence to benefit "all of humanity" but with for-profit subsidiaries under its control. Jill Horwitz, a professor in law and medicine at UCLA School of Law who has studied OpenAI, said that when two sides of a joint venture between a nonprofit and a for-profit come into conflict, the charitable purpose must always win out. "It's the job of the board first, and then the regulators and the court, to ensure that the promise that was made to the public to pursue the charitable interest is kept," she said. Altman recently confirmed that OpenAI is considering a corporate restructure but did not offer any specifics. A source told The Associated Press, however, that the company is looking at the possibility of turning OpenAI into a public benefit corporation. No final decision has been made by the board and the timing of the shift hasn't been determined, the source said. In the event the nonprofit loses control of its subsidiaries, some experts think OpenAI may have to pay for the interests and assets that had belonged to the nonprofit. So far, most observers agree OpenAI has carefully orchestrated its relationships between its nonprofit and its various other corporate entities to try to avoid that. However, they also see OpenAI as ripe for scrutiny from regulators, including the Internal Revenue Service and state attorneys general in Delaware, where its incorporated, and in California, where it operates. Bret Taylor, chair of the OpenAI nonprofit's board, said in a statement that the board was focused on fulfilling its fiduciary obligation. "Any potential restructuring would ensure the nonprofit continues to exist and thrive, and receives full value for its current stake in the OpenAI for-profit with an enhanced ability to pursue its mission," he said. Here are the main questions nonprofit experts have How could OpenAI convert from nonprofit to for-profit? Tax-exempt nonprofits sometimes decide to change their status. That requires what the IRS calls a conversion. Tax law requires money or assets donated to a tax-exempt organization to remain within the charitable sector. If the initial organization becomes a for-profit, generally, a conversion is needed where the for-profit pays the fair market value of the assets to another charitable organization. Even if the nonprofit OpenAI continues to exist in some way, some experts argue it would have to be paid fair market value for any assets that get transferred to its for-profit subsidiaries. In OpenAI's case, there are many questions: What assets belong to its nonprofit? What is the value of those assets? Do they include intellectual property, patents, commercial products and licenses? Also, what is the value of giving up control of the for-profit subsidiaries? If OpenAI were to diminish the control that its nonprofit has over its other business entities, a regulator may require answers to those questions. Any change to OpenAI's structure will require it to navigate the laws governing tax-exempt organizations. Andrew Steinberg, counsel at Venable LLP and a member of the American Bar Association's nonprofit organizations committee, said it would be an "extraordinary" transaction to change the structure of corporate subsidiaries of a tax-exempt nonprofit. "It would be a complex, involved process with numerous different legal and regulatory considerations to work through," he said. "But it's not impossible." Is OpenAI carrying out its charitable mission? To be granted tax-exempt status, OpenAI had to apply to the IRS and explain its charitable purpose. OpenAI provided The Associated Press a copy of that September 2016 application, which shows how significantly the organization's plans for its technology and structure have changed. OpenAI spokesperson Liz Bourgeois said in an email that the organization's missions and goals remained constant, though the way it's carried out its mission has evolved alongside advances in technology. When OpenAI incorporated as a nonprofit in Delaware, it wrote that its purpose was, "to provide funding for research, development and distribution of technology related to artificial intelligence." In tax filings, it's also described its mission as building, "general-purpose artificial intelligence (AI) that safely benefits humanity, unconstrained by a need to generate financial return." Steinberg said there is no problem with the organization's plans changing as long as it reported that information on its annual tax returns, which it has. But some observers, including Elon Musk, who was a board member and early supporter of OpenAI and has sued the organization, are skeptical that it has been faithful to its mission. The "godfather of AI" Geoffrey Hinton, who was co-awarded the Nobel Prize in physics on Tuesday, has also expressed concern about OpenAI's evolution, openly boasting that one of his former students, Ilya Sutskever, who went on to co-found the organization, helped oust Altman as CEO before bringing him back. "OpenAI was set up with a big emphasis on safety. Its primary objective was to develop artificial general intelligence and ensure that it was safe," Hinton said, adding that "over time, it turned out that Sam Altman was much less concerned with safety than with profits. And I think that's unfortunate." Sutskever, who led a team focused on AI safety at OpenAI, left the organization in May and has started his own AI company. OpenAI for its part says it is proud of its safety record. Will OpenAI board members avoid conflicts of interest? Ultimately, this question returns to the board of OpenAI's nonprofit, and the extent to which it is acting to further the organization's charitable mission. Steinberg said that any regulators looking at a nonprofit board's decision will be most interested in the process through which it arrived at that decision, not necessarily whether it reached the best decision. He said regulators, "will often defer to the business judgment of members of the board as long as the transactions don't involve conflict of interests for any of the board members. They don't stand to gain financially from the transaction." Whether any board members were to benefit financially from any change in OpenAI's structure could also be of interest to nonprofit regulators. In response to questions about if Altman might be given equity in the for-profit subsidiary in any potential restructuring, OpenAI board chair Taylor said in a statement, "The board has had discussions about whether it would be beneficial to the company and our mission to have Sam be compensated with equity, but no specific figures have been discussed nor have any decisions been made."

Changing OpenAI's nonprofit structure would raise questions about its future

NEW YORK (AP) -- The artificial intelligence maker OpenAI may face a costly and inconvenient reckoning with its nonprofit origins even as its valuation recently exploded to $157 billion. Nonprofit tax experts have been closely watching OpenAI, the maker of ChatGPT, since last November when its board ousted and rehired CEO Sam Altman. Now, some believe the company may have reached -- or exceeded -- the limits of its corporate structure, under which it is organized as a nonprofit whose mission is to develop artificial intelligence to benefit "all of humanity" but with for-profit subsidiaries under its control. Jill Horwitz, a professor in law and medicine at UCLA School of Law who has studied OpenAI, said that when two sides of a joint venture between a nonprofit and a for-profit come into conflict, the charitable purpose must always win out. "It's the job of the board first, and then the regulators and the court, to ensure that the promise that was made to the public to pursue the charitable interest is kept," she said. Altman recently confirmed that OpenAI is considering a corporate restructure but did not offer any specifics. A source told The Associated Press, however, that the company is looking at the possibility of turning OpenAI into a public benefit corporation. No final decision has been made by the board and the timing of the shift hasn't been determined, the source said. In the event the nonprofit loses control of its subsidiaries, some experts think OpenAI may have to pay for the interests and assets that had belonged to the nonprofit. So far, most observers agree OpenAI has carefully orchestrated its relationships between its nonprofit and its various other corporate entities to try to avoid that. However, they also see OpenAI as ripe for scrutiny from regulators, including the Internal Revenue Service and state attorneys general in Delaware, where its incorporated, and in California, where it operates. Bret Taylor, chair of the OpenAI nonprofit's board, said in a statement that the board was focused on fulfilling its fiduciary obligation. "Any potential restructuring would ensure the nonprofit continues to exist and thrive, and receives full value for its current stake in the OpenAI for-profit with an enhanced ability to pursue its mission," he said. Here are the main questions nonprofit experts have: Tax-exempt nonprofits sometimes decide to change their status. That requires what the IRS calls a conversion. Tax law requires money or assets donated to a tax-exempt organization to remain within the charitable sector. If the initial organization becomes a for-profit, generally, a conversion is needed where the for-profit pays the fair market value of the assets to another charitable organization. Even if the nonprofit OpenAI continues to exist in some way, some experts argue it would have to be paid fair market value for any assets that get transferred to its for-profit subsidiaries. In OpenAI's case, there are many questions: What assets belong to its nonprofit? What is the value of those assets? Do they include intellectual property, patents, commercial products and licenses? Also, what is the value of giving up control of the for-profit subsidiaries? If OpenAI were to diminish the control that its nonprofit has over its other business entities, a regulator may require answers to those questions. Any change to OpenAI's structure will require it to navigate the laws governing tax-exempt organizations. Andrew Steinberg, counsel at Venable LLP and a member of the American Bar Association's nonprofit organizations committee, said it would be an "extraordinary" transaction to change the structure of corporate subsidiaries of a tax-exempt nonprofit. "It would be a complex, involved process with numerous different legal and regulatory considerations to work through," he said. "But it's not impossible." To be granted tax-exempt status, OpenAI had to apply to the IRS and explain its charitable purpose. OpenAI provided The Associated Press a copy of that September 2016 application, which shows how significantly the organization's plans for its technology and structure have changed. OpenAI spokesperson Liz Bourgeois said in an email that the organization's missions and goals remained constant, though the way it's carried out its mission has evolved alongside advances in technology. When OpenAI incorporated as a nonprofit in Delaware, it wrote that its purpose was, "to provide funding for research, development and distribution of technology related to artificial intelligence." In tax filings, it's also described its mission as building, "general-purpose artificial intelligence (AI) that safely benefits humanity, unconstrained by a need to generate financial return." Steinberg said there is no problem with the organization's plans changing as long as it reported that information on its annual tax returns, which it has. But some observers, including Elon Musk, who was a board member and early supporter of OpenAI and has sued the organization, are skeptical that it has been faithful to its mission. The "godfather of AI" Geoffrey Hinton, who was co-awarded the Nobel Prize in physics on Tuesday, has also expressed concern about OpenAI's evolution, openly boasting that one of his former students, Ilya Sutskever, who went on to co-found the organization, helped oust Altman as CEO before bringing him back. "OpenAI was set up with a big emphasis on safety. Its primary objective was to develop artificial general intelligence and ensure that it was safe," Hinton said, adding that "over time, it turned out that Sam Altman was much less concerned with safety than with profits. And I think that's unfortunate." Sutskever, who led a team focused on AI safety at OpenAI, left the organization in May and has started his own AI company. OpenAI for its part says it is proud of its safety record. Ultimately, this question returns to the board of OpenAI's nonprofit, and the extent to which it is acting to further the organization's charitable mission. Steinberg said that any regulators looking at a nonprofit board's decision will be most interested in the process through which it arrived at that decision, not necessarily whether it reached the best decision. He said regulators, "will often defer to the business judgment of members of the board as long as the transactions don't involve conflict of interests for any of the board members. They don't stand to gain financially from the transaction." Whether any board members were to benefit financially from any change in OpenAI's structure could also be of interest to nonprofit regulators. In response to questions about if Altman might be given equity in the for-profit subsidiary in any potential restructuring, OpenAI board chair Taylor said in a statement, "The board has had discussions about whether it would be beneficial to the company and our mission to have Sam be compensated with equity, but no specific figures have been discussed nor have any decisions been made." The Associated Press and OpenAI have a licensing and technology agreement that allows OpenAI access to part of AP's text archives. Associated Press coverage of philanthropy and nonprofits receives support through the AP's collaboration with The Conversation US, with funding from Lilly Endowment Inc. The AP is solely responsible for this content. For all of AP's philanthropy coverage, visit https://apnews.com/hub/philanthropy.

As OpenAI attracts billions in new investment, its goal of balancing profit with purpose is getting more challenging to pull off

Tufts University provides funding as a founding partner of The Conversation US. OpenAI, the artificial intelligence company that developed the popular ChatGPT chatbot and the text-to-art program Dall-E, is at a crossroads. On Oct. 2, 2024, it announced that it had obtained US$6.6 billion in new funding from investors and that the business was worth an estimated $157 billion - making it only the second startup ever to be valued at over $100 billion. Unlike other big tech companies, OpenAI is a nonprofit with a for-profit subsidiary that is overseen by a nonprofit board of directors. Since its founding in 2015, OpenAI's official mission has been "to build artificial general intelligence (AGI) that is safe and benefits all of humanity." By late September 2024, The Associated Press, Reuters, The Wall Street Journal and many other media outlets were reporting that OpenAI plans to discard its nonprofit status and become a for-profit tech company managed by investors. These stories have all cited anonymous sources. The New York Times, referencing documents from the recent funding round, reported that unless this change happens within two years, the $6.6 billion in equity would become debt owed to the investors who provided that funding. The Conversation U.S. asked Alnoor Ebrahim, a Tufts University management scholar, to explain why OpenAI's leaders' reported plans to change its structure would be significant and potentially problematic. How have its top executives and board members responded? There has been a lot of leadership turmoil at OpenAI. The disagreements boiled over in November 2023, when its board briefly ousted Sam Altman, its CEO. He got his job back in less than a week, and then three board members resigned. The departing directors were advocates for building stronger guardrails and encouraging regulation to protect humanity from potential harms posed by AI. Over a dozen senior staff members have quit since then, including several other co-founders and executives responsible for overseeing OpenAI's safety policies and practices. At least two of them have joined Anthropic, a rival founded by a former OpenAI executive responsible for AI safety. Some of the departing executives say that Altman has pushed the company to launch products prematurely. Safety "has taken a backseat to shiny products," said OpenAI's former safety team leader Jan Leike, who quit in May 2024. Why would OpenAI's structure change? OpenAI's deep-pocketed investors cannot own shares in the organization under its existing nonprofit governance structure, nor can they get a seat on its board of directors. That's because OpenAI is incorporated as a nonprofit whose purpose is to benefit society rather than private interests. Until now, all rounds of investments, including a reported total of $13 billion from Microsoft, have been channeled through a for-profit subsidiary that belongs to the nonprofit. The current structure allows OpenAI to accept money from private investors in exchange for a future portion of its profits. But those investors do not get a voting seat on the board, and their profits are "capped." According to information previously made public, OpenAI's original investors can't earn more than 100 times the money they provided. The goal of this hybrid governance model is to balance profits with OpenAI's safety-focused mission. Becoming a for-profit enterprise would make it possible for its investors to acquire ownership stakes in OpenAI and no longer have to face a cap on their potential profits. Down the road, OpenAI could also go public and raise capital on the stock market. Altman reportedly seeks to personally acquire a 7% equity stake in OpenAI, according to a Bloomberg article that cited unnamed sources. That arrangement is not allowed for nonprofit executives, according to BoardSource, an association of nonprofit board members and executives. Instead, the association explains, nonprofits "must reinvest surpluses back into the organization and its tax-exempt purpose." What kind of company might OpenAI become? The Washington Post and other media outlets have reported, also citing unnamed sources, that OpenAI might become a "public benefit corporation" - a business that aims to benefit society and earn profits. Examples of businesses with this status, known as B Corps., include outdoor clothing and gear company Patagonia and eyewear maker Warby Parker. It's more typical that a for-profit business - not a nonprofit - becomes a benefit corporation, according to the B Lab, a network that sets standards and offers certification for B Corps. It is unusual for a nonprofit to do this because nonprofit governance already requires those groups to benefit society. Boards of companies with this legal status are free to consider the interests of society, the environment and people who aren't its shareholders, but that is not required. The board may still choose to make profits a top priority and can drop its benefit status to satisfy its investors. That is what online craft marketplace Etsy did in 2017, two years after becoming a publicly traded company. In my view, any attempt to convert a nonprofit into a public benefit corporation is a clear move away from focusing on the nonprofit's mission. And there will be a risk that becoming a benefit corporation would just be a ploy to mask a shift toward focusing on revenue growth and investors' profits. Many legal scholars and other experts are predicting that OpenAI will not do away with its hybrid ownership model entirely because of legal restrictions on the placement of nonprofit assets in private hands. But I think OpenAI has a possible workaround: It could try to dilute the nonprofit's control by making it a minority shareholder in a new for-profit structure. This would effectively eliminate the nonprofit board's power to hold the company accountable. Such a move could lead to an investigation by the office of the relevant state attorney general and potentially by the Internal Revenue Service. What could happen if OpenAI turns into a for-profit company? The stakes for society are high. AI's potential harms are wide-ranging, and some are already apparent, such as deceptive political campaigns and bias in health care. If OpenAI, an industry leader, begins to focus more on earning profits than ensuring AI's safety, I believe that these dangers could get worse. Geoffrey Hinton, who won the 2024 Nobel Prize in physics for his artificial intelligence research, has cautioned that AI may exacerbate inequality by replacing "lots of mundane jobs." He believes that there's a 50% probability "that we'll have to confront the problem of AI trying to take over" from humanity. And even if OpenAI did retain board members for whom safety is a top concern, the only common denominator for the members of its new corporate board would be their obligation to protect the interests of the company's shareholders, who would expect to earn a profit. While such expectations are common on a for-profit board, they constitute a conflict of interest on a nonprofit board where mission must come first and board members cannot benefit financially from the organization's work. The arrangement would, no doubt, please OpenAI's investors. But would it be good for society? The purpose of nonprofit control over a for-profit subsidiary is to ensure that profit does not interfere with the nonprofit's mission. Without guardrails to ensure that the board seeks to limit harm to humanity from AI, there would be little reason for it to prevent the company from maximizing profit, even if its chatbots and other AI products endanger society. Regardless of what OpenAI does, most artificial intelligence companies are already for-profit businesses. So, in my view, the only way to manage the potential harms is through better industry standards and regulations that are starting to take shape. California's governor vetoed such a bill in September 2024 on the grounds it would slow innovation - but I believe slowing it down is exactly what is needed, given the dangers AI already poses to society.

As OpenAI attracts new investment, balancing profit with purpose is getting more challenging to pull off

OpenAI, the artificial intelligence company that developed the popular ChatGPT chatbot and the text-to-art program Dall-E, is at a crossroads. On Oct. 2, 2024, it announced that it had obtained US$6.6 billion in new funding from investors and that the business was worth an estimated $157 billion -- making it only the second startup ever to be valued at over $100 billion. Unlike other big tech companies, OpenAI is a nonprofit with a for-profit subsidiary that is overseen by a nonprofit board of directors. Since its founding in 2015, OpenAI's official mission has been "to build artificial general intelligence (AGI) that is safe and benefits all of humanity." By late September 2024, The Associated Press, Reuters, The Wall Street Journal and many other media outlets were reporting that OpenAI plans to discard its nonprofit status and become a for-profit tech company managed by investors. These stories have all cited anonymous sources. The New York Times, referencing documents from the recent funding round, reported that unless this change happens within two years, the $6.6 billion in equity would become debt owed to the investors who provided that funding. The Conversation U.S. asked Alnoor Ebrahim, a Tufts University management scholar, to explain why OpenAI's leaders' reported plans to change its structure would be significant and potentially problematic. How have its top executives and board members responded? There has been a lot of leadership turmoil at OpenAI. The disagreements boiled over in November 2023, when its board briefly ousted Sam Altman, its CEO. He got his job back in less than a week, and then three board members resigned. The departing directors were advocates for building stronger guardrails and encouraging regulation to protect humanity from potential harms posed by AI. Over a dozen senior staff members have quit since then, including several other co-founders and executives responsible for overseeing OpenAI's safety policies and practices. At least two of them have joined Anthropic, a rival founded by a former OpenAI executive responsible for AI safety. Some of the departing executives say that Altman has pushed the company to launch products prematurely. OpenAI's deep-pocketed investors cannot own shares in the organization under its existing nonprofit governance structure, nor can they get a seat on its board of directors. That's because OpenAI is incorporated as a nonprofit whose purpose is to benefit society rather than private interests. Until now, all rounds of investments, including a reported total of $13 billion from Microsoft, have been channeled through a for-profit subsidiary that belongs to the nonprofit. The current structure allows OpenAI to accept money from private investors in exchange for a future portion of its profits. But those investors do not get a voting seat on the board, and their profits are "capped." According to information previously made public, OpenAI's original investors can't earn more than 100 times the money they provided. The goal of this hybrid governance model is to balance profits with OpenAI's safety-focused mission. Becoming a for-profit enterprise would make it possible for its investors to acquire ownership stakes in OpenAI and no longer have to face a cap on their potential profits. Down the road, OpenAI could also go public and raise capital on the stock market. Altman reportedly seeks to personally acquire a 7% equity stake in OpenAI, according to a Bloomberg article that cited unnamed sources. That arrangement is not allowed for nonprofit executives, according to BoardSource, an association of nonprofit board members and executives. Instead, the association explains, nonprofits "must reinvest surpluses back into the organization and its tax-exempt purpose." What kind of company might OpenAI become? The Washington Post and other media outlets have reported, also citing unnamed sources, that OpenAI might become a "public benefit corporation" -- a business that aims to benefit society and earn profits. Examples of businesses with this status, known as B Corps., include outdoor clothing and gear company Patagonia and eyewear maker Warby Parker. It's more typical that a for-profit business -- not a nonprofit -- becomes a benefit corporation, according to the B Lab, a network that sets standards and offers certification for B Corps. It is unusual for a nonprofit to do this because nonprofit governance already requires those groups to benefit society. Boards of companies with this legal status are free to consider the interests of society, the environment and people who aren't its shareholders, but that is not required. The board may still choose to make profits a top priority and can drop its benefit status to satisfy its investors. That is what online craft marketplace Etsy did in 2017, two years after becoming a publicly traded company. In my view, any attempt to convert a nonprofit into a public benefit corporation is a clear move away from focusing on the nonprofit's mission. And there will be a risk that becoming a benefit corporation would just be a ploy to mask a shift toward focusing on revenue growth and investors' profits. Many legal scholars and other experts are predicting that OpenAI will not do away with its hybrid ownership model entirely because of legal restrictions on the placement of nonprofit assets in private hands. But I think OpenAI has a possible workaround: It could try to dilute the nonprofit's control by making it a minority shareholder in a new for-profit structure. This would effectively eliminate the nonprofit board's power to hold the company accountable. Such a move could lead to an investigation by the office of the relevant state attorney general and potentially by the Internal Revenue Service. What could happen if OpenAI turns into a for-profit company? The stakes for society are high. AI's potential harms are wide-ranging, and some are already apparent, such as deceptive political campaigns and bias in health care. If OpenAI, an industry leader, begins to focus more on earning profits than ensuring AI's safety, I believe that these dangers could get worse. Geoffrey Hinton, who won the 2024 Nobel Prize in physics for his artificial intelligence research, has cautioned that AI may exacerbate inequality by replacing "lots of mundane jobs." He believes that there's a 50% probability "that we'll have to confront the problem of AI trying to take over" from humanity. And even if OpenAI did retain board members for whom safety is a top concern, the only common denominator for the members of its new corporate board would be their obligation to protect the interests of the company's shareholders, who would expect to earn a profit. While such expectations are common on a for-profit board, they constitute a conflict of interest on a nonprofit board where mission must come first and board members cannot benefit financially from the organization's work. The arrangement would, no doubt, please OpenAI's investors. But would it be good for society? The purpose of nonprofit control over a for-profit subsidiary is to ensure that profit does not interfere with the nonprofit's mission. Without guardrails to ensure that the board seeks to limit harm to humanity from AI, there would be little reason for it to prevent the company from maximizing profit, even if its chatbots and other AI products endanger society. Regardless of what OpenAI does, most artificial intelligence companies are already for-profit businesses. So, in my view, the only way to manage the potential harms is through better industry standards and regulations that are starting to take shape. California's governor vetoed such a bill in September 2024 on the grounds it would slow innovation -- but I believe slowing it down is exactly what is needed, given the dangers AI already poses to society.

Documents show OpenAI's long journey from nonprofit to $157 billion valued company

Called OpenAI, the nonprofit told the IRS its goal was to "advance digital intelligence in the way that is most likely to benefit humanity as a whole, unconstrained by a need to generate financial return."Back in 2016, a scientific research organization incorporated in Delaware and based in Mountain View, California, applied to be recognized as a tax-exempt charitable organization by the Internal Revenue Service. Called OpenAI, the nonprofit told the IRS its goal was to "advance digital intelligence in the way that is most likely to benefit humanity as a whole, unconstrained by a need to generate financial return." Its assets included a $10 million loan from one of its four founding directors and now CEO, Sam Altman. The application, which nonprofits are required to disclose and which OpenAI provided to The Associated Press, offers a view back in time to the origins of the artificial intelligence giant that has since grown to include a for-profit subsidiary recently valued at $157 billion by investors. It's one measure of the vast distance OpenAI - and the technology that it researches and develops - has traveled in under a decade. In the application, OpenAI indicated it did not plan to enter into any joint ventures with for-profit organizations, which it has since done. It also said it did "not plan to play any role in developing commercial products or equipment," and promised to make its research freely available to the public. A spokesperson for OpenAI, Liz Bourgeois, said in an email that the organization's missions and goals have remained constant, though the way it's carried out its mission has evolved alongside advances in technology. She also said the nonprofit does not carry out any commercial activities. Attorneys who specialize in advising nonprofits have been watching OpenAI's meteoric rise and its changing structure closely. Some wonder if its size and the scale of its current ambitions have reached or exceeded the limits of how nonprofits and for-profits may interact. They also wonder the extent to which its primary activities advance its charitable mission, which it must, and whether some may privately benefit from its work, which is prohibited. In general, nonprofit experts agree that OpenAI has gone to great lengths to arrange its corporate structure to comply with the rules that govern nonprofit organizations. OpenAI's application to the IRS appears typical, said Andrew Steinberg, counsel at Venable LLP and a member of the American Bar Association's nonprofit organizations committee. If the organization's plans and structure changed, it would need to report that information on its annual tax returns, Steinberg said, which it has. "At the time that the IRS reviewed the application, there wasn't information that that corporate structure that exists today and the investment structure that they pursued was what they had in mind," he said. "And that's okay because that may have developed later." Here are some highlights from the application: Early research goals At inception, OpenAI's research plans look quaint in light of the race to develop AI that was in part set off by its release of ChatGPT in 2022. OpenAI told the IRS it planned to train an AI agent to solve a wide variety of games. It aimed to build a robot to perform housework and to develop a technology that could "follow complex instructions in natural language." Today, its products, which include text-to-image generators and chatbots that can detect emotion and write code, far exceed those technical thresholds. No commercial ambitions The nonprofit OpenAI indicated on the application form that it had no plans to enter into joint ventures with for-profit entities. It also wrote, "OpenAI does not plan to play any role in developing commercial products or equipment. It intends to make its research freely available to the public on a nondiscriminatory basis." OpenAI spokesperson Bourgeois said the organization believes the best way to accomplish its mission is to develop products that help people use AI to solve problems, including many products it offers for free. But they also believe developing commercial partnerships has helped further their mission, she said. Intellectual property OpenAI reported to the IRS in 2016 that regularly sharing its research "with the general public is central to the mission of OpenAI. OpenAI will regularly release its research results on its website and share software it has developed with the world under open source software licenses." It also wrote it "intends to retain the ownership of any intellectual property it develops." The value of that intellectual property and whether it belongs to the nonprofit or for-profit subsidiary could become important questions if OpenAI decides to alter its corporate structure, as Altman confirmed in September it was considering.

Documents show OpenAI's long journey from nonprofit to $157B valued company

Back in 2016, a scientific research organization incorporated in Delaware and based in Mountain View, California, applied to be recognized as a tax-exempt charitable organization by the Internal Revenue Services. Called OpenAI, the nonprofit told the IRS its goal was to "advance digital intelligence in the way that is most likely to benefit humanity as a whole, unconstrained by a need to generate financial return." Its assets included a $10 million loan from one of its four founding directors and now CEO, Sam Altman. The application, which nonprofits are required to disclose and which OpenAI provided to The Associated Press, offers a view back in time to the origins of the artificial intelligence giant that has since grown to include a for-profit subsidiary recently valued at $157 billion by investors. It's one measure of the vast distance OpenAI -- and the technology that it researches and develops -- has traveled in under a decade. In the application, OpenAI indicated it did not plan to enter into any joint ventures with for-profit organizations, which it has since done. It also said it did "not plan to play any role in developing commercial products or equipment," and promised to make its research freely available to the public. A spokesperson for OpenAI, Liz Bourgeois, said in an email that the organization's missions and goals have remained constant, though the way it's carried out its mission has evolved alongside advances in technology. Attorneys who specialize in advising nonprofits have been watching OpenAI's meteoric rise and its changing structure closely. Some wonder if its size and the scale of its current ambitions have reached or exceeded the limits of how nonprofits and for-profits may interact. They also wonder the extent to which its primary activities advance its charitable mission, which it must, and whether some may privately benefit from its work, which is prohibited. In general, nonprofit experts agree that OpenAI has gone to great lengths to arrange its corporate structure to comply with the rules that govern nonprofit organizations. OpenAI's application to the IRS appears typical, said Andrew Steinberg, counsel at Venable LLP and a member of the American Bar Association's nonprofit organizations committee. If the organization's plans and structure changed, it would need to report that information on its annual tax returns, Steinberg said, which it has. "At the time that the IRS reviewed the application, there wasn't information that that corporate structure that exists today and the investment structure that they pursued was what they had in mind," he said. "And that's okay because that may have developed later." At inception, OpenAI's research plans look quaint in light of the race to develop AI that was in part set off by its release of ChatGPT in 2022. OpenAI told the IRS it planned to train an AI agent to solve a wide variety of games. It aimed to build a robot to perform housework and to develop a technology that could "follow complex instructions in natural language." Today, its products, which include text-to-image generators and chatbots that can detect emotion and write code, far exceed those technical thresholds. No commercial ambitions The nonprofit OpenAI indicated on the application form that it had no plans to enter into joint ventures with for-profit entities. It also wrote, "OpenAI does not plan to play any role in developing commercial products or equipment. It intends to make its research freely available to the public on a nondiscriminatory basis." OpenAI spokesperson Bourgeois said the organization believes the best way to accomplish its mission is to develop products that help people use AI to solve problems, including many products it offers for free. But they also believe developing commercial partnerships has helped further their mission, she said. Intellectual property OpenAI reported to the IRS in 2016 that regularly sharing its research "with the general public is central to the mission of OpenAI. OpenAI will regularly release its research results on its website and share software it has developed with the world under open source software licenses." It also wrote it "intends to retain the ownership of any intellectual property it develops." The value of that intellectual property and whether it belongs to the nonprofit or for-profit subsidiary could become important questions if OpenAI decides to alter its corporate structure, as Altman confirmed in September it was considering. ___ The Associated Press and OpenAI have a licensing and technology agreement that allows OpenAI access to part of AP's text archives. ___ Associated Press coverage of philanthropy and nonprofits receives support through the AP's collaboration with The Conversation US, with funding from Lilly Endowment Inc. The AP is solely responsible for this content. For all of AP's philanthropy coverage, visit https://apnews.com/hub/philanthropy.

Changing OpenAI's nonprofit structure would raise questions about its future

NEW YORK -- The artificial intelligence maker OpenAI may face a costly and inconvenient reckoning with its nonprofit origins even as its valuation recently exploded to $157 billion. Nonprofit tax experts have been closely watching OpenAI, the maker of ChatGPT, since last November when its board ousted and rehired CEO Sam Altman. Now, some believe the company may have reached -- or exceeded -- the limits of its corporate structure, under which it is organized as a nonprofit whose mission is to develop artificial intelligence to benefit "all of humanity" but with for-profit subsidiaries under its control. Jill Horwitz, a professor in law and medicine at UCLA School of Law who has studied OpenAI, said that when two sides of a joint venture between a nonprofit and a for-profit come into conflict, the charitable purpose must always win out. "It's the job of the board first, and then the regulators and the court, to ensure that the promise that was made to the public to pursue the charitable interest is kept," she said. Altman recently confirmed that OpenAI is considering a corporate restructure but did not offer any specifics. A source told The Associated Press, however, that the company is looking at the possibility of turning OpenAI into a public benefit corporation. No final decision has been made by the board and the timing of the shift hasn't been determined, the source said. In the event the nonprofit loses control of its subsidiaries, some experts think OpenAI may have to pay for the interests and assets that had belonged to the nonprofit. So far, most observers agree OpenAI has carefully orchestrated its relationships between its nonprofit and its various other corporate entities to try to avoid that. However, they also see OpenAI as ripe for scrutiny from regulators, including the Internal Revenue Service and state attorneys general in Delaware, where its incorporated, and in California, where it operates. Bret Taylor, chair of the OpenAI nonprofit's board, said in a statement that the board was focused on fulfilling its fiduciary obligation. "Any potential restructuring would ensure the nonprofit continues to exist and thrive, and receives full value for its current stake in the OpenAI for-profit with an enhanced ability to pursue its mission," he said. Here are the main questions nonprofit experts have: Tax-exempt nonprofits sometimes decide to change their status. That requires what the IRS calls a conversion. Tax law requires money or assets donated to a tax-exempt organization to remain within the charitable sector. If the initial organization becomes a for-profit, generally, a conversion is needed where the for-profit pays the fair market value of the assets to another charitable organization. Even if the nonprofit OpenAI continues to exist in some way, some experts argue it would have to be paid fair market value for any assets that get transferred to its for-profit subsidiaries. In OpenAI's case, there are many questions: What assets belong to its nonprofit? What is the value of those assets? Do they include intellectual property, patents, commercial products and licenses? Also, what is the value of giving up control of the for-profit subsidiaries? If OpenAI were to diminish the control that its nonprofit has over its other business entities, a regulator may require answers to those questions. Any change to OpenAI's structure will require it to navigate the laws governing tax-exempt organizations. Andrew Steinberg, counsel at Venable LLP and a member of the American Bar Association's nonprofit organizations committee, said it would be an "extraordinary" transaction to change the structure of corporate subsidiaries of a tax-exempt nonprofit. "It would be a complex, involved process with numerous different legal and regulatory considerations to work through," he said. "But it's not impossible." To be granted tax-exempt status, OpenAI had to apply to the IRS and explain its charitable purpose. OpenAI provided The Associated Press a copy of that September 2016 application, which shows how significantly the organization's plans for its technology and structure have changed. OpenAI spokesperson Liz Bourgeois said in an email that the organization's missions and goals remained constant, though the way it's carried out its mission has evolved alongside advances in technology. When OpenAI incorporated as a nonprofit in Delaware, it wrote that its purpose was, "to provide funding for research, development and distribution of technology related to artificial intelligence." In tax filings, it's also described its mission as building, "general-purpose artificial intelligence (AI) that safely benefits humanity, unconstrained by a need to generate financial return." Steinberg said there is no problem with the organization's plans changing as long as it reported that information on its annual tax returns, which it has. But some observers, including Elon Musk, who was a board member and early supporter of OpenAI and has sued the organization, are skeptical that it has been faithful to its mission. The "godfather of AI" Geoffrey Hinton, who was co-awarded the Nobel Prize in physics on Tuesday, has also expressed concern about OpenAI's evolution, openly boasting that one of his former students, Ilya Sutskever, who went on to co-found the organization, helped oust Altman as CEO before bringing him back. "OpenAI was set up with a big emphasis on safety. Its primary objective was to develop artificial general intelligence and ensure that it was safe," Hinton said, adding that "over time, it turned out that Sam Altman was much less concerned with safety than with profits. And I think that's unfortunate." Sutskever, who led a team focused on AI safety at OpenAI, left the organization in May and has started his own AI company. OpenAI for its part says it is proud of its safety record. Ultimately, this question returns to the board of OpenAI's nonprofit, and the extent to which it is acting to further the organization's charitable mission. Steinberg said that any regulators looking at a nonprofit board's decision will be most interested in the process through which it arrived at that decision, not necessarily whether it reached the best decision. He said regulators, "will often defer to the business judgment of members of the board as long as the transactions don't involve conflict of interests for any of the board members. They don't stand to gain financially from the transaction." Whether any board members were to benefit financially from any change in OpenAI's structure could also be of interest to nonprofit regulators. In response to questions about if Altman might be given equity in the for-profit subsidiary in any potential restructuring, OpenAI board chair Taylor said in a statement, "The board has had discussions about whether it would be beneficial to the company and our mission to have Sam be compensated with equity, but no specific figures have been discussed nor have any decisions been made." ___ The Associated Press and OpenAI have a licensing and technology agreement that allows OpenAI access to part of AP's text archives. ___ Associated Press coverage of philanthropy and nonprofits receives support through the AP's collaboration with The Conversation US, with funding from Lilly Endowment Inc. The AP is solely responsible for this content. For all of AP's philanthropy coverage, visit https://apnews.com/hub/philanthropy.

Documents show OpenAI's long journey from nonprofit to $157B valued company

Back in 2016, a scientific research organization incorporated in Delaware and based in Mountain View, California, applied to be recognized as a tax-exempt charitable organization by the Internal Revenue Services. Called OpenAI, the nonprofit told the IRS its goal was to "advance digital intelligence in the way that is most likely to benefit humanity as a whole, unconstrained by a need to generate financial return." Its assets included a $10 million loan from one of its four founding directors and now CEO, Sam Altman. The application, which nonprofits are required to disclose and which OpenAI provided to The Associated Press, offers a view back in time to the origins of the artificial intelligence giant that has since grown to include a for-profit subsidiary recently valued at $157 billion by investors. It's one measure of the vast distance OpenAI -- and the technology that it researches and develops -- has traveled in under a decade. In the application, OpenAI indicated it did not plan to enter into any joint ventures with for-profit organizations, which it has since done. It also said it did "not plan to play any role in developing commercial products or equipment," and promised to make its research freely available to the public. A spokesperson for OpenAI, Liz Bourgeois, said in an email that the organization's missions and goals have remained constant, though the way it's carried out its mission has evolved alongside advances in technology. Attorneys who specialize in advising nonprofits have been watching OpenAI's meteoric rise and its changing structure closely. Some wonder if its size and the scale of its current ambitions have reached or exceeded the limits of how nonprofits and for-profits may interact. They also wonder the extent to which its primary activities advance its charitable mission, which it must, and whether some may privately benefit from its work, which is prohibited. In general, nonprofit experts agree that OpenAI has gone to great lengths to arrange its corporate structure to comply with the rules that govern nonprofit organizations. OpenAI's application to the IRS appears typical, said Andrew Steinberg, counsel at Venable LLP and a member of the American Bar Association's nonprofit organizations committee. If the organization's plans and structure changed, it would need to report that information on its annual tax returns, Steinberg said, which it has. "At the time that the IRS reviewed the application, there wasn't information that that corporate structure that exists today and the investment structure that they pursued was what they had in mind," he said. "And that's okay because that may have developed later." Here are some highlights from the application: At inception, OpenAI's research plans look quaint in light of the race to develop AI that was in part set off by its release of ChatGPT in 2022. OpenAI told the IRS it planned to train an AI agent to solve a wide variety of games. It aimed to build a robot to perform housework and to develop a technology that could "follow complex instructions in natural language." Today, its products, which include text-to-image generators and chatbots that can detect emotion and write code, far exceed those technical thresholds. The nonprofit OpenAI indicated on the application form that it had no plans to enter into joint ventures with for-profit entities. It also wrote, "OpenAI does not plan to play any role in developing commercial products or equipment. It intends to make its research freely available to the public on a nondiscriminatory basis." OpenAI spokesperson Bourgeois said the organization believes the best way to accomplish its mission is to develop products that help people use AI to solve problems, including many products it offers for free. But they also believe developing commercial partnerships has helped further their mission, she said. OpenAI reported to the IRS in 2016 that regularly sharing its research "with the general public is central to the mission of OpenAI. OpenAI will regularly release its research results on its website and share software it has developed with the world under open source software licenses." It also wrote it "intends to retain the ownership of any intellectual property it develops." The value of that intellectual property and whether it belongs to the nonprofit or for-profit subsidiary could become important questions if OpenAI decides to alter its corporate structure, as Altman confirmed in September it was considering. © 2024 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without permission.

Documents Show OpenAI's Long Journey From Nonprofit to $157B Valued Company

Back in 2016, a scientific research organization incorporated in Delaware and based in Mountain View, California, applied to be recognized as a tax-exempt charitable organization by the Internal Revenue Services. Called OpenAI, the nonprofit told the IRS its goal was to "advance digital intelligence in the way that is most likely to benefit humanity as a whole, unconstrained by a need to generate financial return." Its assets included a $10 million loan from one of its four founding directors and now CEO, Sam Altman. The application, which nonprofits are required to disclose and which OpenAI provided to The Associated Press, offers a view back in time to the origins of the artificial intelligence giant that has since grown to include a for-profit subsidiary recently valued at $157 billion by investors. It's one measure of the vast distance OpenAI -- and the technology that it researches and develops -- has traveled in under a decade. In the application, OpenAI indicated it did not plan to enter into any joint ventures with for-profit organizations, which it has since done. It also said it did "not plan to play any role in developing commercial products or equipment," and promised to make its research freely available to the public. A spokesperson for OpenAI, Liz Bourgeois, said in an email that the organization's missions and goals have remained constant, though the way it's carried out its mission has evolved alongside advances in technology. Attorneys who specialize in advising nonprofits have been watching OpenAI's meteoric rise and its changing structure closely. Some wonder if its size and the scale of its current ambitions have reached or exceeded the limits of how nonprofits and for-profits may interact. They also wonder the extent to which its primary activities advance its charitable mission, which it must, and whether some may privately benefit from its work, which is prohibited. In general, nonprofit experts agree that OpenAI has gone to great lengths to arrange its corporate structure to comply with the rules that govern nonprofit organizations. OpenAI's application to the IRS appears typical, said Andrew Steinberg, counsel at Venable LLP and a member of the American Bar Association's nonprofit organizations committee. If the organization's plans and structure changed, it would need to report that information on its annual tax returns, Steinberg said, which it has. "At the time that the IRS reviewed the application, there wasn't information that that corporate structure that exists today and the investment structure that they pursued was what they had in mind," he said. "And that's okay because that may have developed later." At inception, OpenAI's research plans look quaint in light of the race to develop AI that was in part set off by its release of ChatGPT in 2022. OpenAI told the IRS it planned to train an AI agent to solve a wide variety of games. It aimed to build a robot to perform housework and to develop a technology that could "follow complex instructions in natural language." Today, its products, which include text-to-image generators and chatbots that can detect emotion and write code, far exceed those technical thresholds. No commercial ambitions The nonprofit OpenAI indicated on the application form that it had no plans to enter into joint ventures with for-profit entities. It also wrote, "OpenAI does not plan to play any role in developing commercial products or equipment. It intends to make its research freely available to the public on a nondiscriminatory basis." OpenAI spokesperson Bourgeois said the organization believes the best way to accomplish its mission is to develop products that help people use AI to solve problems, including many products it offers for free. But they also believe developing commercial partnerships has helped further their mission, she said. Intellectual property OpenAI reported to the IRS in 2016 that regularly sharing its research "with the general public is central to the mission of OpenAI. OpenAI will regularly release its research results on its website and share software it has developed with the world under open source software licenses." It also wrote it "intends to retain the ownership of any intellectual property it develops." The value of that intellectual property and whether it belongs to the nonprofit or for-profit subsidiary could become important questions if OpenAI decides to alter its corporate structure, as Altman confirmed in September it was considering. ___ The Associated Press and OpenAI have a licensing and technology agreement that allows OpenAI access to part of AP's text archives. ___ Associated Press coverage of philanthropy and nonprofits receives support through the AP's collaboration with The Conversation US, with funding from Lilly Endowment Inc. The AP is solely responsible for this content. For all of AP's philanthropy coverage, visit https://apnews.com/hub/philanthropy. Copyright 2024 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Changing OpenAI's Nonprofit Structure Would Raise Questions About Its Future

NEW YORK (AP) -- The artificial intelligence maker OpenAI may face a costly and inconvenient reckoning with its nonprofit origins even as its valuation recently exploded to $157 billion. Nonprofit tax experts have been closely watching OpenAI, the maker of ChatGPT, since last November when its board ousted and rehired CEO Sam Altman. Now, some believe the company may have reached -- or exceeded -- the limits of its corporate structure, under which it is organized as a nonprofit whose mission is to develop artificial intelligence to benefit "all of humanity" but with for-profit subsidiaries under its control. Jill Horwitz, a professor in law and medicine at UCLA School of Law who has studied OpenAI, said that when two sides of a joint venture between a nonprofit and a for-profit come into conflict, the charitable purpose must always win out. "It's the job of the board first, and then the regulators and the court, to ensure that the promise that was made to the public to pursue the charitable interest is kept," she said. Altman recently confirmed that OpenAI is considering a corporate restructure but did not offer any specifics. A source told The Associated Press, however, that the company is looking at the possibility of turning OpenAI into a public benefit corporation. No final decision has been made by the board and the timing of the shift hasn't been determined, the source said. In the event the nonprofit loses control of its subsidiaries, some experts think OpenAI may have to pay for the interests and assets that had belonged to the nonprofit. So far, most observers agree OpenAI has carefully orchestrated its relationships between its nonprofit and its various other corporate entities to try to avoid that. However, they also see OpenAI as ripe for scrutiny from regulators, including the Internal Revenue Service and state attorneys general in Delaware, where its incorporated, and in California, where it operates. Bret Taylor, chair of the OpenAI nonprofit's board, said in a statement that the board was focused on fulfilling its fiduciary obligation. "Any potential restructuring would ensure the nonprofit continues to exist and thrive, and receives full value for its current stake in the OpenAI for-profit with an enhanced ability to pursue its mission," he said. Here are the main questions nonprofit experts have: How could OpenAI convert from nonprofit to for-profit? Tax-exempt nonprofits sometimes decide to change their status. That requires what the IRS calls a conversion. Tax law requires money or assets donated to a tax-exempt organization to remain within the charitable sector. If the initial organization becomes a for-profit, generally, a conversion is needed where the for-profit pays the fair market value of the assets to another charitable organization. Even if the nonprofit OpenAI continues to exist in some way, some experts argue it would have to be paid fair market value for any assets that get transferred to its for-profit subsidiaries. In OpenAI's case, there are many questions: What assets belong to its nonprofit? What is the value of those assets? Do they include intellectual property, patents, commercial products and licenses? Also, what is the value of giving up control of the for-profit subsidiaries? If OpenAI were to diminish the control that its nonprofit has over its other business entities, a regulator may require answers to those questions. Any change to OpenAI's structure will require it to navigate the laws governing tax-exempt organizations. Andrew Steinberg, counsel at Venable LLP and a member of the American Bar Association's nonprofit organizations committee, said it would be an "extraordinary" transaction to change the structure of corporate subsidiaries of a tax-exempt nonprofit. "It would be a complex, involved process with numerous different legal and regulatory considerations to work through," he said. "But it's not impossible." Is OpenAI carrying out its charitable mission? To be granted tax-exempt status, OpenAI had to apply to the IRS and explain its charitable purpose. OpenAI provided The Associated Press a copy of that September 2016 application, which shows how significantly the organization's plans for its technology and structure have changed. OpenAI spokesperson Liz Bourgeois said in an email that the organization's missions and goals remained constant, though the way it's carried out its mission has evolved alongside advances in technology. When OpenAI incorporated as a nonprofit in Delaware, it wrote that its purpose was, "to provide funding for research, development and distribution of technology related to artificial intelligence." In tax filings, it's also described its mission as building, "general-purpose artificial intelligence (AI) that safely benefits humanity, unconstrained by a need to generate financial return." Steinberg said there is no problem with the organization's plans changing as long as it reported that information on its annual tax returns, which it has. But some observers, including Elon Musk, who was a board member and early supporter of OpenAI and has sued the organization, are skeptical that it has been faithful to its mission. The "godfather of AI" Geoffrey Hinton, who was co-awarded the Nobel Prize in physics on Tuesday, has also expressed concern about OpenAI's evolution, openly boasting that one of his former students, Ilya Sutskever, who went on to co-found the organization, helped oust Altman as CEO before bringing him back. "OpenAI was set up with a big emphasis on safety. Its primary objective was to develop artificial general intelligence and ensure that it was safe," Hinton said, adding that "over time, it turned out that Sam Altman was much less concerned with safety than with profits. And I think that's unfortunate." Sutskever, who led a team focused on AI safety at OpenAI, left the organization in May and has started his own AI company. OpenAI for its part says it is proud of its safety record. Will OpenAI board members avoid conflicts of interest? Ultimately, this question returns to the board of OpenAI's nonprofit, and the extent to which it is acting to further the organization's charitable mission. Steinberg said that any regulators looking at a nonprofit board's decision will be most interested in the process through which it arrived at that decision, not necessarily whether it reached the best decision. He said regulators, "will often defer to the business judgment of members of the board as long as the transactions don't involve conflict of interests for any of the board members. They don't stand to gain financially from the transaction." Whether any board members were to benefit financially from any change in OpenAI's structure could also be of interest to nonprofit regulators. In response to questions about if Altman might be given equity in the for-profit subsidiary in any potential restructuring, OpenAI board chair Taylor said in a statement, "The board has had discussions about whether it would be beneficial to the company and our mission to have Sam be compensated with equity, but no specific figures have been discussed nor have any decisions been made." ___ The Associated Press and OpenAI have a licensing and technology agreement that allows OpenAI access to part of AP's text archives. ___ Associated Press coverage of philanthropy and nonprofits receives support through the AP's collaboration with The Conversation US, with funding from Lilly Endowment Inc. The AP is solely responsible for this content. For all of AP's philanthropy coverage, visit https://apnews.com/hub/philanthropy. Copyright 2024 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Changing OpenAI's nonprofit structure would raise questions about its future

The artificial intelligence maker OpenAI may face a costly and inconvenient reckoning with its nonprofit origins even as its valuation recently exploded to $157 billion. Nonprofit tax experts have been closely watching OpenAI, the maker of ChatGPT, since last November when its board ousted and rehired CEO Sam Altman. Now, some believe the company may have reached -- or exceeded -- the limits of its corporate structure, under which it is organized as a nonprofit whose mission is to develop artificial intelligence to benefit "all of humanity" but with for-profit subsidiaries under its control. Jill Horwitz, a professor in law and medicine at UCLA School of Law who has studied OpenAI, said that when two sides of a joint venture between a nonprofit and a for-profit come into conflict, the charitable purpose must always win out. "It's the job of the board first, and then the regulators and the court, to ensure that the promise that was made to the public to pursue the charitable interest is kept," she said. Altman recently confirmed that OpenAI is considering a corporate restructure but did not offer any specifics. A source told The Associated Press, however, that the company is looking at the possibility of turning OpenAI into a public benefit corporation. No final decision has been made by the board and the timing of the shift hasn't been determined, the source said. In the event the nonprofit loses control of its subsidiaries, some experts think OpenAI may have to pay for the interests and assets that had belonged to the nonprofit. So far, most observers agree OpenAI has carefully orchestrated its relationships between its nonprofit and its various other corporate entities to try to avoid that. However, they also see OpenAI as ripe for scrutiny from regulators, including the Internal Revenue Service and state attorneys general in Delaware, where its incorporated, and in California, where it operates. Bret Taylor, chair of the OpenAI nonprofit's board, said in a statement that the board was focused on fulfilling its fiduciary obligation. "Any potential restructuring would ensure the nonprofit continues to exist and thrive, and receives full value for its current stake in the OpenAI for-profit with an enhanced ability to pursue its mission," he said. Here are the main questions nonprofit experts have: Tax-exempt nonprofits sometimes decide to change their status. That requires what the IRS calls a conversion. Tax law requires money or assets donated to a tax-exempt organization to remain within the charitable sector. If the initial organization becomes a for-profit, generally, a conversion is needed where the for-profit pays the fair market value of the assets to another charitable organization. Even if the nonprofit OpenAI continues to exist in some way, some experts argue it would have to be paid fair market value for any assets that get transferred to its for-profit subsidiaries. In OpenAI's case, there are many questions: What assets belong to its nonprofit? What is the value of those assets? Do they include intellectual property, patents, commercial products and licenses? Also, what is the value of giving up control of the for-profit subsidiaries? If OpenAI were to diminish the control that its nonprofit has over its other business entities, a regulator may require answers to those questions. Any change to OpenAI's structure will require it to navigate the laws governing tax-exempt organizations. Andrew Steinberg, counsel at Venable LLP and a member of the American Bar Association's nonprofit organizations committee, said it would be an "extraordinary" transaction to change the structure of corporate subsidiaries of a tax-exempt nonprofit. "It would be a complex, involved process with numerous different legal and regulatory considerations to work through," he said. "But it's not impossible." To be granted tax-exempt status, OpenAI had to apply to the IRS and explain its charitable purpose. OpenAI provided The Associated Press a copy of that September 2016 application, which shows how significantly the organization's plans for its technology and structure have changed. OpenAI spokesperson Liz Bourgeois said in an email that the organization's missions and goals remained constant, though the way it's carried out its mission has evolved alongside advances in technology. When OpenAI incorporated as a nonprofit in Delaware, it wrote that its purpose was, "to provide funding for research, development and distribution of technology related to artificial intelligence." In tax filings, it's also described its mission as building, "general-purpose artificial intelligence (AI) that safely benefits humanity, unconstrained by a need to generate financial return." Steinberg said there is no problem with the organization's plans changing as long as it reported that information on its annual tax returns, which it has. But some observers, including Elon Musk, who was a board member and early supporter of OpenAI and has sued the organization, are skeptical that it has been faithful to its mission. The "godfather of AI" Geoffrey Hinton, who was co-awarded the Nobel Prize in physics on Tuesday, has also expressed concern about OpenAI's evolution, openly boasting that one of his former students, Ilya Sutskever, who went on to co-found the organization, helped oust Altman as CEO before bringing him back. "OpenAI was set up with a big emphasis on safety. Its primary objective was to develop artificial general intelligence and ensure that it was safe," Hinton said, adding that "over time, it turned out that Sam Altman was much less concerned with safety than with profits. And I think that's unfortunate." Sutskever, who led a team focused on AI safety at OpenAI, left the organization in May and has started his own AI company. OpenAI for its part says it is proud of its safety record. Ultimately, this question returns to the board of OpenAI's nonprofit, and the extent to which it is acting to further the organization's charitable mission. Steinberg said that any regulators looking at a nonprofit board's decision will be most interested in the process through which it arrived at that decision, not necessarily whether it reached the best decision. He said regulators, "will often defer to the business judgment of members of the board as long as the transactions don't involve conflict of interests for any of the board members. They don't stand to gain financially from the transaction." Whether any board members were to benefit financially from any change in OpenAI's structure could also be of interest to nonprofit regulators. In response to questions about if Altman might be given equity in the for-profit subsidiary in any potential restructuring, OpenAI board chair Taylor said in a statement, "The board has had discussions about whether it would be beneficial to the company and our mission to have Sam be compensated with equity, but no specific figures have been discussed nor have any decisions been made." © 2024 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without permission.

Changing OpenAI's nonprofit structure would raise questions about its future

NEW YORK (AP) -- The artificial intelligence maker OpenAI may face a costly and inconvenient reckoning with its nonprofit origins even as its valuation recently exploded to USD157 billion. Nonprofit tax experts have been closely watching OpenAI, the maker of ChatGPT, since last November when its board ousted and rehired CEO Sam Altman. Now, some believe the company may have reached -- or exceeded -- the limits of its corporate structure, under which it is organised as a nonprofit whose mission is to develop artificial intelligence to benefit "all of humanity" but with for-profit subsidiaries under its control. Jill Horwitz, a professor in law and medicine at UCLA School of Law who has studied OpenAI, said that when two sides of a joint venture between a nonprofit and a for-profit come into conflict, the charitable purpose must always win out. "It's the job of the board first, and then the regulators and the court, to ensure that the promise that was made to the public to pursue the charitable interest is kept," she said. Altman recently confirmed that OpenAI is considering a corporate restructure but did not offer any specifics. A source told The Associated Press, however, that the company is looking at the possibility of turning OpenAI into a public benefit corporation. No final decision has been made by the board and the timing of the shift hasn't been determined, the source said. In the event the nonprofit loses control of its subsidiaries, some experts think OpenAI may have to pay for the interests and assets that had belonged to the nonprofit. So far, most observers agree OpenAI has carefully orchestrated its relationships between its nonprofit and its various other corporate entities to try to avoid that. However, they also see OpenAI as ripe for scrutiny from regulators, including the Internal Revenue Service and state attorneys general in Delaware, where its incorporated, and in California, where it operates. Bret Taylor, chair of the OpenAI nonprofit's board, said in a statement that the board was focused on fulfilling its fiduciary obligation. "Any potential restructuring would ensure the nonprofit continues to exist and thrive, and receives full value for its current stake in the OpenAI for-profit with an enhanced ability to pursue its mission," he said. Here are the main questions nonprofit experts have: How could OpenAI convert from nonprofit to for-profit? Tax-exempt nonprofits sometimes decide to change their status. That requires what the IRS calls a conversion. Tax law requires money or assets donated to a tax-exempt organisation to remain within the charitable sector. If the initial organisation becomes a for-profit, generally, a conversion is needed where the for-profit pays the fair market value of the assets to another charitable organisation. Even if the nonprofit OpenAI continues to exist in some way, some experts argue it would have to be paid fair market value for any assets that get transferred to its for-profit subsidiaries. In OpenAI's case, there are many questions: What assets belong to its nonprofit? What is the value of those assets? Do they include intellectual property, patents, commercial products and licenses? Also, what is the value of giving up control of the for-profit subsidiaries? If OpenAI were to diminish the control that its nonprofit has over its other business entities, a regulator may require answers to those questions. Any change to OpenAI's structure will require it to navigate the laws governing tax-exempt organisations. Andrew Steinberg, counsel at Venable LLP and a member of the American Bar Association's nonprofit organisations committee, said it would be an "extraordinary" transaction to change the structure of corporate subsidiaries of a tax-exempt nonprofit. "It would be a complex, involved process with numerous different legal and regulatory considerations to work through," he said. "But it's not impossible." Is OpenAI carrying out its charitable mission? To be granted tax-exempt status, OpenAI had to apply to the IRS and explain its charitable purpose. OpenAI provided The Associated Press a copy of that September 2016 application, which shows how significantly the organization's plans for its technology and structure have changed. OpenAI spokesperson Liz Bourgeois said in an email that the organisation's missions and goals remained constant, though the way it's carried out its mission has evolved alongside advances in technology. When OpenAI incorporated as a nonprofit in Delaware, it wrote that its purpose was, "to provide funding for research, development and distribution of technology related to artificial intelligence." In tax filings, it's also described its mission as building, "general-purpose artificial intelligence (AI) that safely benefits humanity, unconstrained by a need to generate financial return." Steinberg said there is no problem with the organisation's plans changing as long as it reported that information on its annual tax returns, which it has. But some observers, including Elon Musk, who was a board member and early supporter of OpenAI and has sued the organization, are skeptical that it has been faithful to its mission. The "godfather of AI" Geoffrey Hinton, who was co-awarded the Nobel Prize in physics on Tuesday, has also expressed concern about OpenAI's evolution, openly boasting that one of his former students, Ilya Sutskever, who went on to co-found the organisation, helped oust Altman as CEO before bringing him back. "OpenAI was set up with a big emphasis on safety. Its primary objective was to develop artificial general intelligence and ensure that it was safe," Hinton said, adding that "over time, it turned out that Sam Altman was much less concerned with safety than with profits. And I think that's unfortunate." Sutskever, who led a team focused on AI safety at OpenAI, left the organisation in May and has started his own AI company. OpenAI for its part says it is proud of its safety record. Will OpenAI board members avoid conflicts of interest? Ultimately, this question returns to the board of OpenAI's nonprofit, and the extent to which it is acting to further the organisation's charitable mission. Steinberg said that any regulators looking at a nonprofit board's decision will be most interested in the process through which it arrived at that decision, not necessarily whether it reached the best decision. He said regulators, "will often defer to the business judgment of members of the board as long as the transactions don't involve conflict of interests for any of the board members. They don't stand to gain financially from the transaction." Whether any board members were to benefit financially from any change in OpenAI's structure could also be of interest to nonprofit regulators. In response to questions about whether Altman might be given equity in the for-profit subsidiary in any potential restructuring, OpenAI board chair Taylor said in a statement, "The board has had discussions about whether it would be beneficial to the company and our mission to have Sam be compensated with equity, but no specific figures have been discussed nor have any decisions been made."

Documents show OpenAI's long journey from nonprofit to $157B valued company

Back in 2016, the artificial intelligence maker OpenAI had just incorporated as a nonprofit and applied to the Internal Revenue Service for tax-exempt status Back in 2016, a scientific research organization incorporated in Delaware and based in Mountain View, California, applied to be recognized as a tax-exempt charitable organization by the Internal Revenue Services. Called OpenAI, the nonprofit told the IRS its goal was to "advance digital intelligence in the way that is most likely to benefit humanity as a whole, unconstrained by a need to generate financial return." Its assets included a $10 million loan from one of its four founding directors and now CEO, Sam Altman. The application, which nonprofits are required to disclose and which OpenAI provided to The Associated Press, offers a view back in time to the origins of the artificial intelligence giant that has since grown to include a for-profit subsidiary recently valued at $157 billion by investors. It's one measure of the vast distance OpenAI -- and the technology that it researches and develops -- has traveled in under a decade. In the application, OpenAI indicated it did not plan to enter into any joint ventures with for-profit organizations, which it has since done. It also said it did "not plan to play any role in developing commercial products or equipment," and promised to make its research freely available to the public. A spokesperson for OpenAI, Liz Bourgeois, said in an email that the organization's missions and goals have remained constant, though the way it's carried out its mission has evolved alongside advances in technology. Attorneys who specialize in advising nonprofits have been watching OpenAI's meteoric rise and its changing structure closely. Some wonder if its size and the scale of its current ambitions have reached or exceeded the limits of how nonprofits and for-profits may interact. They also wonder the extent to which its primary activities advance its charitable mission, which it must, and whether some may privately benefit from its work, which is prohibited. In general, nonprofit experts agree that OpenAI has gone to great lengths to arrange its corporate structure to comply with the rules that govern nonprofit organizations. OpenAI's application to the IRS appears typical, said Andrew Steinberg, counsel at Venable LLP and a member of the American Bar Association's nonprofit organizations committee. If the organization's plans and structure changed, it would need to report that information on its annual tax returns, Steinberg said, which it has. "At the time that the IRS reviewed the application, there wasn't information that that corporate structure that exists today and the investment structure that they pursued was what they had in mind," he said. "And that's okay because that may have developed later." Here are some highlights from the application: At inception, OpenAI's research plans look quaint in light of the race to develop AI that was in part set off by its release of ChatGPT in 2022. OpenAI told the IRS it planned to train an AI agent to solve a wide variety of games. It aimed to build a robot to perform housework and to develop a technology that could "follow complex instructions in natural language." Today, its products, which include text-to-image generators and chatbots that can detect emotion and write code, far exceed those technical thresholds. The nonprofit OpenAI indicated on the application form that it had no plans to enter into joint ventures with for-profit entities. It also wrote, "OpenAI does not plan to play any role in developing commercial products or equipment. It intends to make its research freely available to the public on a nondiscriminatory basis." OpenAI spokesperson Bourgeois said the organization believes the best way to accomplish its mission is to develop products that help people use AI to solve problems, including many products it offers for free. But they also believe developing commercial partnerships has helped further their mission, she said. OpenAI reported to the IRS in 2016 that regularly sharing its research "with the general public is central to the mission of OpenAI. OpenAI will regularly release its research results on its website and share software it has developed with the world under open source software licenses." It also wrote it "intends to retain the ownership of any intellectual property it develops." The value of that intellectual property and whether it belongs to the nonprofit or for-profit subsidiary could become important questions if OpenAI decides to alter its corporate structure, as Altman confirmed in September it was considering. ___ The Associated Press and OpenAI have a licensing and technology agreement that allows OpenAI access to part of AP's text archives. ___ Associated Press coverage of philanthropy and nonprofits receives support through the AP's collaboration with The Conversation US, with funding from Lilly Endowment Inc. The AP is solely responsible for this content. For all of AP's philanthropy coverage, visit https://apnews.com/hub/philanthropy.

Documents show OpenAI's long journey from non-profit to USD157B valued company

AP - Back in 2016, a scientific research organisation incorporated in Delaware and based in Mountain View, California, applied to be recognised as a tax-exempt charitable organisation by the Internal Revenue Service. Called OpenAI, the non-profit told the IRS its goal was to "advance digital intelligence in the way that is most likely to benefit humanity as a whole, unconstrained by a need to generate financial return". Its assets included a USD10 million loan from one of its four founding directors and now Chief Executive Officer, Sam Altman. The application, which non-profits are required to disclose and which OpenAI provided to The Associated Press, offers a view back in time to the origins of the artificial intelligence giant that has since grown to include a for-profit subsidiary recently valued at USD157 billion by investors. It's one measure of the vast distance OpenAI - and the technology that it researches and develops - has travelled in under a decade. In the application, OpenAI indicated it did not plan to enter into any joint ventures with for-profit organisations, which it has since done. It also said it did "not plan to play any role in developing commercial products or equipment", and promised to make its research freely available to the public. A spokesperson for OpenAI, Liz Bourgeois, said in an e-mail that the organisation's missions and goals have remained constant, though the way it's carried out its mission has evolved alongside advances in technology. She also said the non-profit does not carry out any commercial activities. Attorneys who specialise in advising non-profits have been watching OpenAI's meteoric rise and its changing structure closely. Some wonder if its size and the scale of its current ambitions have reached or exceeded the limits of how non-profits and for-profits may interact. They also wonder the extent to which its primary activities advance its charitable mission, which it must, and whether some may privately benefit from its work, which is prohibited. In general, non-profit experts agree that OpenAI has gone to great lengths to arrange its corporate structure to comply with the rules that govern non-profit organisations. OpenAI's application to the IRS appears typical, said Andrew Steinberg, counsel at Venable LLP and a member of the American Bar Association's non-profit organisations committee. If the organisation's plans and structure changed, it would need to report that information on its annual tax returns, Steinberg said, which it has. "At the time that the IRS reviewed the application, there wasn't information that that corporate structure that exists today and the investment structure that they pursued was what they had in mind," he said. "And that's okay because that may have developed later." At inception, OpenAI's research plans look quaint in light of the race to develop AI that was in part set off by its release of ChatGPT in 2022. OpenAI told the IRS it planned to train an AI agent to solve a wide variety of games. It aimed to build a robot to perform housework and to develop a technology that could "follow complex instructions in natural language". Today, its products, which include text-to-image generators and chatbots that can detect emotion and write code, far exceed those technical thresholds. NO COMMERCIAL AMBITIONS The non-profit OpenAI indicated on the application form that it had no plans to enter into joint ventures with for-profit entities. It also wrote, "OpenAI does not plan to play any role in developing commercial products or equipment. It intends to make its research freely available to the public on a nondiscriminatory basis." OpenAI spokesperson Bourgeois said the organisation believes the best way to accomplish its mission is to develop products that help people use AI to solve problems, including many products it offers for free. But they also believe developing commercial partnerships has helped further their mission, she said. INTELLECTUAL PROPERTY OpenAI reported to the IRS in 2016 that regularly sharing its research "with the general public is central to the mission of OpenAI. OpenAI will regularly release its research results on its website and share software it has developed with the world under open source software licences". It also wrote it "intends to retain the ownership of any intellectual property it develops". The value of that intellectual property and whether it belongs to the non-profit or for-profit subsidiary could become important questions if OpenAI decides to alter its corporate structure, as Altman confirmed in September it was considering.

It Could Cost OpenAI a Lot to Drop its Nonprofit Structure

The artificial intelligence maker OpenAI may face a costly and inconvenient reckoning with its nonprofit origins even as its valuation recently exploded to $157 billion. Nonprofit tax experts have been closely watching OpenAI, the maker of ChatGPT, since last November when its board ousted and rehired CEO Sam Altman. Now, some believe the company may have reached -- or exceeded -- the limits of its corporate structure, under which it is organized as a nonprofit whose mission is to develop artificial intelligence to benefit "all of humanity" but with for-profit subsidiaries under its control. Jill Horwitz, a professor in law and medicine at UCLA School of Law who has studied OpenAI, said that when two sides of a joint venture between a nonprofit and a for-profit come into conflict, the charitable purpose must always win out. "It's the job of the board first, and then the regulators and the court, to ensure that the promise that was made to the public to pursue the charitable interest is kept," she said. Altman recently confirmed that OpenAI is considering a corporate restructure but did not offer any specifics. A source told The Associated Press, however, that the company is looking at the possibility of turning OpenAI into a public benefit corporation. No final decision has been made by the board and the timing of the shift hasn't been determined, the source said.

OpenAI's Journey to $157 Billion Chronicled in Documents

Back in 2016, a scientific research organization incorporated in Delaware and based in Mountain View, California, applied to be recognized as a tax-exempt charitable organization by the Internal Revenue Services. Called OpenAI, the nonprofit told the IRS its goal was to "advance digital intelligence in the way that is most likely to benefit humanity as a whole, unconstrained by a need to generate financial return." Its assets included a $10 million loan from one of its four founding directors and now CEO, Sam Altman. The application, which nonprofits are required to disclose and which OpenAI provided to The Associated Press, offers a view back in time to the origins of the artificial intelligence giant that has since grown to include a for-profit subsidiary recently valued at $157 billion by investors.

Sam Altman's OpenAI pursuing switch to for-profit structure to avoid...

OpenAI is reportedly "pursuing" plans to abandon its nonprofit roots and restructure as a for-profit entity - a move that could insulate Sam Altman and his allies from "hostile takeovers" or objections over their leadership. The firm's board is planning to restructure as a public benefit corporation - an unusual structure that would have its leaders weigh both societal impact and profit when making decisions, The Financial Times reported. Rival firms like Elon Musk's xAI and Amazon-backed Anthropic use the structure. If the move is finalized, the nonprofit entity that has overseen OpenAI since it was founded in 2015 will continue to exist, but it will no longer be in control of the firm's operations. The restructuring would allow OpenAI to take a "multipronged approach to fiduciary obligations" and a "safe harbor" from any activist investors or attempts to challenge Altman, a personal with knowledge of the talks told the FT. Altman was famously fired by the firm's nonprofit board of directors last fall. Altman returned as CEO in a matter of days as part of talks that saw nearly all of the previous board members resign. Last week, OpenAI raised a whopping $6.6 billion in a fundraising round that valued the company at $157 billion. That's despite the fact that the firm has burned through cash at a rapid clip while developing its next AI models. Sources familiar OpenAI's thinking told the outlet that no final decisions have been made and that the restructuring would likely to take time to complete. The nonprofit entity, which would gain a stake in OpenAI's for-profit corporation, is not expected to be run by Altman. "OpenAI wants to keep that societal licence, with both a mission and a duty, while creating cutting-edge technology," a source told FT. The Post has reached out to OpenAI for comment. Reports about OpenAI's restructuring discussions emerged last month on the same day that chief technology officer Mira Murati and two other top executives resigned from their posts. Their exits were the latest in a significant exodus of top OpenAI executives who have resigned or taken extended leaves since the start of the year. OpenAI has said that it is "focused on building AI that benefits everyone, and we are working with our board to ensure that we're best positioned to succeed in our mission." "The non-profit is core to our mission and will continue to exist and thrive," the company said in a statement when reports about a potential restructuring first surfaced last month. The fundraising round was led by Josh Kushner's Thrive Capital, with other participants including Microsoft, AI chip supplier Nvidia, Khosla Ventures, SoftBank, Abu Dhabi's state-backed MGX fund, Altimeter Capital and Fidelity. The potential restructuring was said to be a sticking point for investors, which can reportedly renegotiate OpenAI's valuation - or receive their money back entirely - if the shift isn't complete within two years, Reuters reported. Altman - who has faced scrutiny over what critics have described as an aggressive and domineering leadership style - is expected to receive an equity stake in the restructured OpenAI, though the exact terms remain unclear. During a staff meeting last month, Altman described reports that his stake could approach 7% -- which would be valued at more than $10 billion - as "ludicrous." Elsewhere, some critics have accused Altman of prioritizing rapid advancement over safety while building advanced AI that could potentially pose a threat to humanity.

Opinion | OpenAI Could Be a Force for Good if It Can Answer These Questions First

Mr. Kassoy is a co-founder and co-chair of B Lab, the nonprofit that oversees B Corp certification and helped write and advocate benefit corporation legislation. OpenAI is now worth as much as Goldman Sachs or AT&T. The artificial intelligence start-up behind ChatGPT has also said it intends to shed its status as a nonprofit to become a for-profit business within two years. Outside experts and OpenAI employees have expressed concern that as a result, the company will shy away from its founding purpose -- to build safe A.I. to "benefit all of humanity" -- in favor of earning profits for investors. Artificial intelligence may be the most consequential technological advance in our lifetime, and OpenAI is unique in the breadth of its potential impact. Its product could displace workers in far-flung industries, from customer service to radiology to film production. Its work is so energy-hungry that it could knock off track the planet's progress on climate change. I'm not a defense expert or a science-fiction writer, but it's clear the effect it will have on our democracy, national security and privacy will be profound. That means how we structure the business of A.I. is a decision that carries great significance. OpenAI has responded to these concerns by saying it will become a public benefit corporation. A benefit corporation is a traditional for-profit company with one key difference: It is legally obligated to balance profit with purpose. Public benefit corporation leaders and boards must consider workers, customers, communities and the environment, not just shareholders, as in a standard corporation. This idea -- some call it "stakeholder governance" -- has caught the imagination of business leaders, with an estimated 15,000 companies globally adopting the new legal form. Think of Patagonia, Allbirds, Chobani and Warby Parker. I helped write the model benefit corporation legislation as a co-founder of the B Corp movement, a community of over 9,000 companies dedicated to using business as a force for good. I championed its passage alongside many business leaders, including Patagonia's Yvon Chouinard. That's why I know OpenAI's approach is insufficient. Yes, becoming a public benefit corporation will give OpenAI's board the ability to make decisions that consider the long-term interests of society and the planet, in addition to its balance sheet. But that should be table stakes for any A.I. company. Public benefit corporations are required to balance the impact of their business decisions with a broad set of interests. This might mean choosing to invest in solar and wind energy, which have higher upfront costs and take time to build but pollute less. It might mean choosing not to offer products or services to clients who pose a risk to worker safety even though that might sacrifice short-term profits. That's a good start. But this structure alone does not ensure that OpenAI will be held accountable. Before proposing some practical solutions, let me be clear: I am deeply invested in the success of A.I. I have advanced metastatic prostate cancer, and, selfishly, I am rooting for OpenAI and its competitors to help accelerate drug development that could save my life, among many other possible benefits to society. However, the company can't do that if it is beholden to investors whose main measure of success is their investment return. Furthermore, the future of humanity shouldn't have to rely on unaccountable executives such as Sam Altman, OpenAI's chief executive, to know if the company is living up to its stated principles. As a first priority, the company has to get its purpose right. In other words, who is OpenAI working for? OpenAI must clearly write in its corporate charter, not just in its marketing materials, how it will serve each of its stakeholders, and who it won't do business with. This might mean committing the company to doing its fair share to help reach global climate goals by sharply reducing the amount of energy from fossil fuels used to power its servers. Second, we can't hold OpenAI accountable for its commitments if we don't know what impact it is having or what's in its source code. Current law requires that public benefit corporations registered in Delaware report on their social impact only once every two years using their own chosen measurements (a much lower bar than most companies have to meet for annual, audited financial reporting). Given the A.I. industry's history of nondisclosure agreements, it is clear that we cannot trust companies to regulate themselves. And even a high-functioning government will not be able to stay ahead of a fast-moving industry. OpenAI needs to commit to transparent, annual, audited impact reporting using independent third-party standards that are as rigorous as its financial reporting requirements. These must be developed in cooperation with organizations and individuals with expertise. If OpenAI is truly serious about serving society and wants to maintain its social license to operate, then I would expect the company to welcome this. Lastly, OpenAI needs a "belt and suspenders" legal structure that ensures its commitments can be enforced. Investors could sue the company for failing to fulfill its purpose, but that outcome is unlikely because they are focused on maximizing their own financial returns. Recently OpenAI created what it says is an independent Safety and Security Committee, but it also has the power to blow that up whenever it becomes inconvenient, just as Microsoft laid off its entire A.I. ethics and society team in 2023. One way to protect and balance these competing interests is through a trust with special decision-making rights. The Guardian news organization in Britain uses its trust to ensure its journalists are free to report without influence from its advertisers. Anthropic, an OpenAI competitor, set up a long-term benefit trust to hold a separate class of stock with expert trustees who will have the right to appoint a majority of Anthropic's board. Perhaps Mr. Altman could take a cue from Patagonia, a brand he's often been spotted wearing. Patagonia's purpose trust owns all of the company's voting stock, meaning that the decision makers are obliged to advance Patagonia's commitment to protecting the earth and its natural resources. It's not a utopian fantasy to believe that OpenAI can solve some of our greatest societal challenges. This can be true only if it is structured and governed to do so. Every day, by applying these same principles, thousands of certified B Corps show that business can be a force for good to create high-quality jobs, rebuild strong communities and solve environmental crises -- all while making money for investors. Surely OpenAI, with its ingenuity and newfound resources, can match their efforts. Andrew Kassoy is a co-founder and co-chair of B Lab Global. (The Times sued OpenAI and Microsoft in December for copyright infringement of news content related to A.I. systems.) The Times is committed to publishing a diversity of letters to the editor. We'd like to hear what you think about this or any of our articles. Here are some tips. And here's our email: [email protected]. Follow the New York Times Opinion section on Facebook, Instagram, TikTok, WhatsApp, X and Threads.

OpenAI pursues public benefit structure to fend off hostile takeovers

Cristina Criddle in San Francisco and Patrick Temple-West in New York OpenAI is pursuing a largely untested corporate structure to defend itself from hostile takeovers and protect chief executive Sam Altman from outsider interference. The artificial intelligence start-up, which last week secured $6.6bn in new funding, is planning to restructure as a public benefit corporation, a new and rare type of company model also adopted by AI rivals including Anthropic and Elon Musk's xAI. A key benefit of this PBC structure is its potential to thwart an unwanted acquisition or an activist's demands, according to multiple people familiar with the company's thinking. This means an existing investor such as Microsoft or another party could be frustrated if they mounted an effort to acquire OpenAI. OpenAI's PBC business would be obliged to balance the best interests of shareholders, a public benefit, and stakeholders, such as employees and society. This "multipronged approach to fiduciary obligations" for a company would give OpenAI a "safe harbour" to wave off activists who might claim the company is not making enough money, according to one person. It "gives you even more flexibility to say 'thanks for calling and have a nice day'," they added. The proposed changes come in a tumultuous period for the fast-growing group, which is now one of Silicon Valley's most valuable companies after completing its latest fundraising at a $150bn valuation. Its new structure will allow it to continue to attract investors and gain the capital it needs to take on well-funded rivals such as Google, and afford the costs associated with building powerful AI models. However, the company has suffered growing pains. Altman was briefly ousted in a boardroom coup a year ago. Several senior staff including its influential chief technology officer Mira Murati have announced their departures in recent weeks. Meanwhile, Musk, who co-founded and helped finance OpenAI in 2015, is suing the company for allegedly abandoning its original mission of benefiting humanity when agreeing a multibillion-dollar partnership with Microsoft. As part of the proposed restructure, the ChatGPT maker will retain a not-for-profit entity, which would be independent and have a stake in the PBC. This not-for-profit would have access to research and technology but solely focus on pursuing OpenAI's mission of benefiting humanity. The not-for-profit would probably be run by a different executive to Altman, who would lead the PBC and focus on developing technology, building products and "everything that needs to be done to be commercially successful", the person familiar to the company's thinking said. Those people close to AI's thinking said decisions had not been made and were being discussed by the board, with any changes likely to take time. "OpenAI wants to keep that societal licence, with both a mission and a duty, while creating cutting-edge technology," one of these people said. OpenAI said: "We remain focused on building AI that benefits everyone, and we are working with our board to ensure that we're best positioned to succeed in our mission." It added: "The non-profit is core to our mission and will continue to exist and thrive." The PBC model is relatively new. Delaware, where most companies are incorporated, only adopted PBC legislation in 2013 and then changed provisions in 2020 to make the structure more enticing. Of the thousands of publicly traded companies in the US, fewer than 20 are PBCs. They include Warby Parker, Black Rifle Coffee and Veeva Systems. However, it has proved popular with AI companies. Both Anthropic, the maker of the Claude AI tool, and Musk's xAI are PBCs. One person close to xAI said this meant its probability of being sued was reduced if it did not act in accordance with the shareholders' interests. The activism defence offered by the PBC model has been previously highlighted by other groups. Lemonade, an online insurance company, has said in regulatory filings that Delaware's PBC structure "could potentially make it easier for a board to reject a hostile bid, even where the takeover would provide the greatest short-term financial yield to investors." The PBC model has not yet been seriously tested in court, nor has it faced the public scrutiny that has already buffeted AI. Several US senators have raised concerns about what threat AI might impose on public safety and national security. If AI executives were called before Congress to testify about their businesses, the PBC model might give the firms a way to deflect criticism, according to experts. Jens Dammann, a professor at the University of Texas School of Law, said PBC provided "more leeway" from a traditional company's duty to shareholders to maximise their wealth. "It is intentionally a way for incumbent management and directors to entrench themselves," he said. "If you can convey the idea to people that you are a good enterprise, a morally safe enterprise and that comes with very little constraints, that has to be tempting to entrepreneurs."

Musk's chances against OpenAI look grim as ChatGPT creator moves to dismiss second lawsuit

Elon Musk's chances of winning his second lawsuit against OpenAI look grim, but in law nothing is entirely hopeless. The entrepreneur has claimed the nonprofit he helped found cannot legally convert to a corporation without violating the very purpose for which it was created nine years ago -- to benefit humanity as a whole by developing the world's first artificial general intelligence (AGI). Musk is seeking to force his former creation to compensate him for treble the $44.6 million he donated over five years and compel it to open-source all the research findings behind its neural network GPT-4. The latter coincidentally would also serve the interests of his own xAI research lab, a direct competitor to OpenAI. Yet U.S. law isn't kind to private litigants like Musk seeking redress against charitable nonprofits to which they have made tax-deductible donations. Attempts made after the fact to demand money back or insist funds be used differently are typically doomed. "All those cases fail," Brian Quinn, a professor of corporate law at Boston College Law School, tells Fortune. "There's very little legal basis for those kinds of claims. Once the money is handed over, that's it." While nonprofits need to be mindful of how they treat donors if they want the checks to keep flowing, they have no shareholders with an economic interest that can be damaged. Legally speaking, the responsibility to litigate on behalf of the public falls to the authorities -- typically the attorney general of a state. "If you donate to a charity, you don't have a lot of recourse to later sue. U.S. law is not very favorable to donors in that regard," Luís Calderón Gómez, a tax law specialist and assistant professor at Yeshiva University's Cardozo Law School, tells Fortune. He believes Musk's chances may improve now that his team has shifted its legal strategy, increasing the number of alleged offenses to 14 from just four -- even if the crux of the matter hasn't changed. Accusing OpenAI of everything from fraud and racketeering to false advertising and unjust enrichment may look like the legal equivalent of throwing spaghetti at a wall, hoping one of the charges somehow sticks. Yet Calderón Gómez believes his case isn't entirely without merit, given that courts may not look kindly on OpenAI's brazen shedding of its nonprofit shell. Musk has alleged the existence of a "Founding Agreement", arranged with CEO Sam Altman, that expressly prohibits this eventuality. He has, however, failed to produce it, arguing instead it was reflected in the nonprofit's December 2015 Certificate of Incorporation sufficiently to prove his point. "If he had that [Founding Agreement], he'd have a very strong case," says Calderón Gómez. He believes Musk would be better off framing his dealings less as a donor and more as a co-founder who signed a binding document. The burden of proof, however, lies with Musk -- and demonstrating that OpenAI had planned to defraud him at the time of its founding will be challenging in the absence of clear evidence. Listing no less than 82 separate legal precedents to back up its argument, lawyers for Altman's company argued on Wednesday that Musk didn't have a leg on which to stand. "What's new is that the carcass of the 'Founding Agreement' (now lowercased and shunted to the back of the complaint) is larded with allegations of fraud, racketeering, and false advertising," OpenAI's lawyers wrote dismissively. "But Musk offers neither the factual nor the legal scaffolding needed to sustain his claims." OpenAI's legal team moved this week to dismiss the lawsuit outright, claiming Musk's second attempt to drag the ChatGPT creator to court was just dressed up in even more hysterical language to deflect from its lack of substance. Musk's legal team at Toberoff & Associates didn't respond to a request from Fortune for comment. OpenAI has been increasingly candid about its plans to become a normal for-profit corporation, telling staff this will likely happen sometime next year. At present, the company has no profits to distribute, and in fact, it continues to lose money due to the exorbitant costs of training and refining its models -- by last account, $5 billion in red ink is expected for this year. Moreover, a string of high-profile exits have occurred over the past six months, leaving CEO Sam Altman as one of only three founding team members left. That hasn't stopped investors from falling over themselves to buy shares in its operating company, which is titularly controlled by the nonprofit. Despite profits being capped, the equity it just raised valued it at $157 billion, making OpenAI one of the most valuable privately owned companies in the world. Musk, who left the board in 2018 and stopped donating entirely two years later, has meanwhile been forced to watch the success from the sidelines -- a success he no longer could claim as his own. Initially he still seemed like the proud parent. Days after ChatGPT launched at the end of 2022, he used his social media platform to draw attention to the invention and even chastised the New York Times twice for failing to cover it. In the subsequent months, however, his tone changed dramatically as OpenAI grabbed headlines and triggered an explosion of interest in AI. After it was clear ChatGPT would soon become the fastest-growing app in history, Musk began to speak out publicly against Altman's research outfit, saying it had become the exact opposite of what he intended. By May of 2023, it was clear he had an ax to grind. That month, Musk told CNBC he had effectively wound up donating to a charity "to save the Amazon rainforest, and instead they became a lumber company, and chopped down the forest and sold it for money." At the time Musk was frustrated investors weren't rewarding Tesla's stock price for its own AI endeavors. He felt viewers ought to know Tesla was also on the cusp of its own ChatGPT moment once his Teslas could drive themselves without human supervision, a feat he qualified as "baby AGI". Musk wasn't about to let OpenAI take all the credit two years after it cashed his last donation. "I am the reason OpenAI exists," he said in the interview. By then Musk had already revealed plans to launch his own ChatGPT competitor, xAI, an idea that would eventually become a reality that July. In February this year, Musk finally sued the company, claiming it had broken its word to remain a nonprofit. Shortly thereafter, OpenAI produced evidence showing Musk was well aware of this likelihood in late 2017, supported it himself, and only broke with the organization after he was not allowed to run it as CEO or subsume it into Tesla. "Elon wanted majority equity, initial board control, and to be CEO," the company revealed, sharing emails exchanged at the time. "We couldn't agree to terms on a for-profit with Elon, because we felt it was against the mission for any individual to have absolute control over OpenAI. He then suggested instead merging OpenAI into Tesla." Exactly one day before OpenAI's scheduled hearing over its first motion to dismiss, the law firm Irell & Manella, which represented Musk at the time, informed California's Superior Court that it was withdrawing the lawsuit -- with no explanation given. Musk filed a second lawsuit in August, but nothing that OpenAI has seen has since changed its mind. "Elon's recycled complaint is without merit and his prior emails continue to speak for themselves," OpenAI told Fortune in a statement. Boston College Law School's Quinn argues the Amazon rainforest analogy doesn't constitute fraud, so long as Altman wasn't actively shopping for chainsaws at the time. Transforming into a logging company several years after Musk was already out the door may be a morally questionable decision, but it isn't an illegal one. Barring a minor miracle, Quinn expects Musk's case to be thrown out at the first opportunity. Musk might refile again since he has an effectively infinite ability to keep funding lawsuits, but eventually, a judge would sanction him. "If there is no factual basis for the allegations, the court is not going to open its doors to say 'anyone who wants to sue anyone else, just come on down here, put some words on paper, we'll place unnecessary costs on defendants just for you to engage in a fishing expedition to come up with some damaging stuff," Quinn says. "Courts are for good reason generally unwilling to allow plaintiffs to bootstrap lawsuits." Musk can, however, take heart in knowing that at least one consumer advocacy group shares his frustration, even if for reasons other than personal. The nonpartisan, Washington, D.C.-based Public Citizen has filed a complaint against Altman's company with California attorney general Rob Bonta over its for-profit transformation. Co-president Robert Weissman wrote the state AG "should insist that an OpenAI conversion to for-profit status reserve for humanity the right to any OpenAI invention of 'artificial general intelligence'." In addition, Public Citizen wants OpenAI to pay roughly equivalent the value extracted from the nonprofit and handed to shareholders -- to endow a new independent foundation for AI safety. That alone should cost the new for-profit tens of billions of dollars, it estimates, something that could serve as a consolation to Musk. When reached by Fortune, Bonta's office wouldn't say whether this has resulted in any enforcement action. "To protect the integrity of our investigations, we're unable to comment on, even to confirm or deny, a potential or ongoing investigation," it said. Yeshiva University's Calderón Gómez believes a state-launched case would have a far better outlook for success than Musk's private lawsuit. "If I were in the California AG's office, I would probably sue," he says. "There's enough facts here that make me believe this hasn't been operated as a nonprofit for a while now."