OpenAI is engages in its bid to transform the non-profit structure of the $157 billion (approx. Rs. 13,20,727 crore) company into a for-profit business by having preliminary discussions with regulators.
The OpenAI is in early talks with the California attorney general’s office over the process to change its corporate structure, as per the two people familiar with the matter.
This process is likely to involve regulators scrutinising how OpenAI values a portfolio of highly lucrative intellectual property, such as its ChatGPT app.
The attorney general in Delaware also has been in communication about the nonprofit to for-profit shift, as details in a letter to OpenAI.
OpenAI, founded in 2015 as a nonprofit research organisation with an idealistic mission of building artificial intelligence that would be safe and beneficial to humanity, is considering a significant shift toward a more conventional for-profit structure.
A simplified for-profit structure is considered more attractive to investors, although it can open the door to questions about whether the company is upholding its original do-gooder public mission.
OpenAI decline to comment on talks with regulators, but said that the nonprofit would continue to exist in any potential corporate restructure.
OpenAI nonprofit board chairman Bret Taylor said :
“While our work remains ongoing as we continue to consult independent financial and legal advisors, 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,”.
In 2019, OpenAI create a cap for-profit subsidiary to help fund the high costs of AI model development.
In 2023, OpenAI’s Chief Executive Officer Sam Altman was fire and rehire by its former nonprofit board.
Sam Altman’s ouster follow tensions with the board over balancing AI safety with the pressure to commercialise OpenAI’s software, among other issues.
Unlike many other nonprofits, OpenAI holds incredibly valuable intellectual property in the form of its proprietary ChatGPT chatbot and relate artificial intelligence technology.
In California, OpenAI has open a dialogue with the office of Attorney General Rob Bonta and will submit the details of its restructuring plan after the proposal is finalise, as per a person who decline to be identified because the discussions are private.
A spokeswoman for Bonta’s office said in a statement it is “committed to protecting charitable assets for their intended purpose,” without commenting on any discussions with OpenAI.
OpenAI plans to change to a public benefit corporation, as per report.
The move will allow it to maintain its mission for social good while operating as a for-profit business, OpenAI Chief Strategy Officer Jason Kwon told employees during a staff meeting in late September, as per the person familiar with the matter.
Jason Kwon told employees this new structure will preserve a nonprofit arm that would own a material amount of the for-profit entity, said the person, who decline to identified.
What stake the nonprofit will receive in the for-profit, and how OpenAI’s assets are value, will be key factors in regulatory approvals for the restructuring, as per the legal experts.
Daren Shaver, a San Francisco-based partner at Hanson Bridgett LLP said :
“It’s not as simple as just turning off your nonprofit status,”.
“Whatever value is those assets has to be properly accounted for.”
The process in California, which would involve going back and forth with Bonta’s office, typically can take a couple of months for an ordinary nonprofit, Daren Shaver said.
But because California law requires whatever value is assigned to the nonprofit assets to be distributed to a charitable cause and OpenAI’s top asset is its intellectual property, the review could be complicate and drawn-out.
Daren Shaver said :
“It’s about convincing the attorney general effectively that the assets are going to the right place,”.
Delaware State Attorney General Kathleen Jennings ask OpenAI in an 9th October 2024 letter to submit its conversion plans, once they are work out, for review by lawyers in her office’s fraud and consumer protection division.
OpenAI’s conversion would also require following up with the secretaries of state in Delaware and California on certain procedures as well as state and federal tax authorities.
Under the terms of its latest investment round, OpenAI’s recent funding could convert to debt if the restructure doesn’t happen within two years, as per reports.
