Changing OpenAI’s nonprofit structure would raise questions about its future
NEW YORK– The artificial intelligence maker OpenAI could face a costly and difficult reckoning, given its origins as a nonprofit Its valuation recently exploded to $157 billion.
Nonprofit tax experts have been keeping a close eye on OpenAI creator of ChatGPTsince last November, when the board CEO Sam Altman ousted and rehired. Some now believe that the company has reached (or exceeded) the limits of its corporate structure, under which it is organized as a nonprofit organization with a mission to develop artificial intelligence for the benefit of “all humanity,” but with for-profit subsidiaries under her responsibility. control.
Jill Horwitz, a professor of law and medicine at the UCLA School of Law who studied OpenAIsaid that when two sides of a joint venture between a nonprofit and a for-profit corporation come into conflict, the charity should always win.
“It is the job first of the board, and then of the regulators and the court, to ensure that the promise made to the public to pursue the charity’s interests is kept,” she said.
Altman recently confirmed that OpenAI is considering one corporate restructuring but gave no details. However, a source told The Associated Press that the company is exploring the possibility of turning OpenAI into a public benefit corporation. No final decision has been made by the board and the timing of the service has not yet been determined, the source said.
In the event that the nonprofit loses control of its subsidiaries, some experts believe OpenAI may have to pay for the interests and assets that belonged to the nonprofit. So far, most observers agree that OpenAI has carefully orchestrated the relationships between the nonprofit and the various other corporate entities to try to prevent this from happening.
However, they also see OpenAI as ripe for investigation by regulators, including the Internal Revenue Service and attorneys general in Delaware, where it was incorporated, and in California, where it operates.
Bret Taylor, chairman of the board of the nonprofit OpenAI, said in a statement that the board was focused on fulfilling its fiduciary obligation.
“Any potential restructuring would ensure that the nonprofit continues to exist and thrive, receiving full value for its current stake in the OpenAI for-profit with an enhanced ability to pursue its mission,” he said.
Here are the top questions from nonprofit experts:
Tax-exempt nonprofits sometimes decide to change their status. That requires what the IRS calls a conversion.
Tax law requires that money or assets donated to a tax-exempt organization remain within the charitable sector. If the original organization becomes a for-profit organization, a conversion is typically required in which the for-profit organization pays the fair market value of its assets to another charitable organization.
Even if the nonprofit OpenAI somehow survives, some experts argue that fair market value should be paid for any assets transferred to its for-profit subsidiaries.
In the case of OpenAI, there are many questions: What assets belong to the nonprofit? What is the value of those assets? Do they include intellectual property, patents, commercial products and licenses? And what is the value of giving up control of for-profit subsidiaries?
If OpenAI were to reduce the control its nonprofit has over its other business entities, a regulator may need answers to those questions. Any change in OpenAI’s structure will require it to orient itself to the laws governing tax-exempt organizations.
Andrew Steinberg, an attorney at Venable LLP and a member of the American Bar Association’s Nonprofit Committee, said it would be an “extraordinary” transaction to change the structure of subsidiaries of a tax-exempt nonprofit.
“It would be a complex, involved process with many different legal and regulatory considerations to work through,” he said. “But it’s not impossible.”
To get the tax exemption, OpenAI had to file with the IRS and explain its charitable purpose. OpenAI provided The Associated Press with a copy of that application from September 2016demonstrating 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 objectives remained constant, although the way it carries out its mission has evolved alongside technological advances.
When OpenAI was incorporated as a nonprofit in Delaware, it wrote that its purpose was “to provide funding for the research, development, and distribution of technology related to artificial intelligence.” Tax filings also describe its mission as building “general-purpose artificial intelligence (AI) that safely benefits humanity without being limited by the need to generate financial returns.”
Steinberg said there is no problem if the organization’s plans change, as long as it reports that information on its annual tax returns, which it has.
But some observers, including Elon Musk, who was a board member and early proponent of OpenAI and has sued the organizationare skeptical that it has remained true to its mission.
The “Godfather of AI” Geoffrey Hintonwho was co-awarded the Nobel Prize in Physics also raised concerns about OpenAI’s evolution on Tuesday, openly bragging that one of his former students, Ilya Sutskever, who co-founded the organization, helped oust Altman as CEO before bringing him back.
“OpenAI was set up with a great emphasis on security. The main goal was to develop artificial general intelligence and make sure it was safe,” Hinton said, adding that “over time it turned out that Sam Altman was much less concerned about safety than he was about profits. And I think that’s a shame.”
Sutskever, who led a team focused on AI security at OpenAI, left the organization in May and has started his own AI company. OpenAI, for its part, says it is proud of its security record.
Ultimately, this question comes back to OpenAI’s nonprofit board, and the extent to which it acts to further the organization’s charitable mission.
Steinberg said any regulators looking at a nonprofit’s decision will be most interested in the process by which it reached that decision, and not necessarily whether it arrived at the best decision.
He said regulators “will often defer to the business judgment of board members as long as the transactions do not create a conflict of interest for any board member. They cannot derive any financial benefit from the transaction.”
Whether board members would benefit financially from a change in OpenAI’s structure could also be of interest to nonprofit regulators.
In response to questions about whether Altman could receive shares in the for-profit subsidiary in a potential restructuring, OpenAI board chairman Taylor said in a statement: “The board has had discussions about whether it would be beneficial to the company and our mission is to compensate Sam with equity, but no specific figures were discussed and no decisions were made.
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The Associated Press and OpenAI have done so a license and technology agreement which gives OpenAI access to some of AP’s text archives.
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