OpenAI, one of the main players in the global artificial intelligence industry and the developer of the world’s most popular chatbot called ChatGPT, is likely to face costly and inconvenient reckoning due to its nonprofit origin, even though the startup’s valuation has reached the $157 billion mark.
Nonprofit tax experts have been closely monitoring the mentioned company lately. The corresponding interest has intensified and started to scale since November last year when the startup’s board of directors ousted chief executive officer Sam Altman but returned him to his position at short notice. This event, related to personnel changes that turned out to be temporary, was resonant and was actively discussed in the information space. It is worth noting that the decision of the board of directors was interpreted in many ways. The versions of the explanation of what happened were different and fundamentally different from each other. In this case, among other things, conspiracy interpretations were recorded, which provided that the dismissal of Sam Altman was because OpenAI allegedly developed such a configuration of artificial intelligence that humanity would not be able to cope with, which is a widespread security threat. At the same time, almost a year after the specified event, which was effectively annulled by Sam Altman’s return to office, no global catastrophe has occurred.
Currently, some experts suggest that the startup may have reached or even exceeded the limits of its corporate structure. It is worth noting that the paradigm of the initial ideology of OpenAI’s existence positions itself as a nonprofit organization whose mission is to develop artificial intelligence for the benefit of all mankind, but with for-profit subsidiaries under its control. The current state of the startup’s operations does not fully correspond to the appropriate concept. In this context, it is worth mentioning that in the present year, Elon Musk accused OpenAI of violating the rules of the funding agreement. The billionaire said that the startup had stopped following the original goals of its existence, noting that the commercial result had become a priority for the ChatGPT developer. Elon Musk also negatively perceives the practice of close interaction between OpenAI and Microsoft. As part of the relevant comments, he underlined that the startup has begun to move away from its original mission of developing open-source technology that does not obey corporate interests.
Jill Horwitz, a professor in law and medicine at UCLA School of Law who has studied OpenAI, said that in situations where the non-profit and for-profit sides of a joint venture come into conflict, the charitable goal should always win. According to her, ensuring the fulfillment of the promise given to the public is primarily the task of the board of directors, and then regulators, and the court.
Last month, Sam Altman confirmed that the startup is considering a corporate restructuring. At the same time, he refrained from detailing the relevant statement in any way. The media, citing insiders aware of the so-called backstage discussions, released information according to which the startup is considering the possibility of transformation into a public benefit corporation. The journalists’ informants separately clarified that the OpenAI board has not yet made a final decision on the mentioned issue. Moreover, they noted that the timing of the shift has not yet been determined.
The experts cited by the media are also focused on predicting the potential consequences of implementing a scenario in which OpenAI, as a nonprofit organization, will lose control of its subsidiaries. In their opinion, in this case, the company will have to pay for the interests and assets that belonged to the nonprofit. It is also worth noting that most observers are convinced that OpenAI has carefully orchestrated the relationship between its nonprofit and its various other corporate entities. In their opinion, these efforts were aimed at avoiding the mentioned necessity as a kind of insurmountable circumstance.
At the same time, according to media reports, most observers are convinced that OpenAI is ready for scrutiny from regulators, including the US Internal Revenue Service and state attorneys general of Delaware, where the startup is incorporated, and California, where the ChatGPT developer operates.
Bret Taylor, chair of the OpenAI nonprofit’s board, said the board is focused on fulfilling its fiduciary obligations. He also separately noted that any potential restructuring will ensure the continued existence and thriving of the nonprofit, and receive full value for its current stake in the startup for-profit with an enhanced ability to pursue its mission.
It is worth noting that for nonprofits that are exempt from taxes, changing their status is not an exclusive or extremely rarely observed practice. The Internal Revenue Service of the United States characterizes the corresponding process as a conversion. The requirements of the current US tax legislation stipulate that money or assets donated to a tax-exempt organization must remain in the charitable sector. If such an organization becomes a for-profit, generally, a conversion is needed, in which the fair market value is paid to another charitable organization.
Some experts cited by the media suggest that even if OpenAI continues to exist as a nonprofit, the mentioned procedure will still be performed. In this case, it is assumed that the startup will pay a fair market value for any assets that get transferred to its for-profit subsidiaries.
At the same time, there are still no answers to many questions related to the procedures that are likely to be implemented if OpenAI changes its status. In the relevant context, it is important which assets belong to the nonprofit of the startup. The value of the relevant assets also matters. Moreover, it is important whether the mentioned category includes intellectual property, commercial products, licenses, and patents.
If OpenAI decides to diminish the control that its nonprofit has over its other business entities, regulators will likely ask questions about the relevant issue. For the ChatGPT developer, any changes in its structure will mean the need to be navigated by the laws that govern the activities of tax-exempt organizations.
Andrew Steinberg, counsel at Venable LLP and a member of the American Bar Association’s nonprofit organizations committee, said that changing the structure of corporate subsidiaries of a nonprofit tax-exempt organization would be an extraordinary transaction. According to the expert, this would be a complex and involved process with numerous different legal and regulatory considerations to work through, but this is possible.
To be granted tax-exempt organization status, OpenAI had to apply to the United States Internal Revenue Service and explain its charitable goals. The media received a copy of the corresponding application from September 2016. It is worth noting that the description of the goals, which was relevant from the point of view of its compliance with the actual activities of the startup eight years ago, differs significantly from the current plans of OpenAI in terms of technology and structure.
A spokesperson for the startup, Liz Bourgeois, in an email reviewed by journalists, said that the organization’s missions and goals remain unchanged, although the ways it is implemented demonstrated changes alongside advances in technology.
During incorporation as a nonprofit in Delaware, OpenAI declared as its goal the provision of funding for research, development, and distribution of technologies related to artificial intelligence. In tax filings, the startup also describes its mission as building general-purpose machine intelligence that safely benefits humanity, not constrained by the need to generate a financial return.
Andrew Steinberg stated that there is no problem with changing the organization’s plans if it reported that information on its annual tax returns, which it has.
The godfather of artificial intelligence Geoffrey Hinton, who this year was co-awarded the Nobel Prize in physics, expressed concern about the evolution of OpenAI. In this context, he separately noted that one of his former students, Ilya Sutskever, who went on to co-found the organization, helped oust Sam Altman as chief executive officer before bringing him back.
Geoffrey Hinton stated that when establishing OpenAI, a lot of attention was paid to security. He noted that the startup’s primary objective was to develop artificial general intelligence and ensure its safety. Geoffrey Hinton stated that over time it turned out that Sam Altman was much less concerned about security than about profits. In his opinion, that is unfortunate.
Ilya Sutskever, who worked in the OpenAI team specializing in the safety of artificial intelligence, left the startup in May. He then founded the firm Safe Superintelligence, or SSI, which also operates in the machine intelligence industry. Ilya Sutskever was OpenAI’s chief scientist and co-led the Superalignment team with Jan Leike, who also left in May to join Anthropic. Last month, it became known that Mr. Sutskever raised investments worth $1 billion for his startup.
It is worth noting that Jan Leike, after deciding to leave OpenAI, posted a message on his account on the social media platform X, which contained the statement that safety culture and processes have been taken a backseat to shiny products in this startup.
In the context of a potential change in the status of the ChatGPT developer, it is of particular importance to what extent the board of the nonprofit contributes to further the organization’s charitable mission.
Andrew Steinberg said that any regulators looking at a nonprofit board’s decision would be most interested in the process through which it arrived at that decision, not necessarily whether it reached the best decision. According to the expert, regulators often defer to the business judgments of board members as long as transactions do not provoke a conflict of interest of any of the board members. They don’t stand to gain financially from the transaction.
It is also highly likely that nonprofit regulators will be interested in the issue of whether any of the board members will benefit financially from any changes in the structure of OpenAI.
The chairman of the startup, Bret Taylor, said about the discussion on the topic of whether it would be beneficial to the startup and its mission to have Sam Altman be compensated with equity, but no specific figures have been discussed nor have any decisions been made.
