OpenAI in talks with regulators in California to become for-profit company

By Shirin Ghaffary and Malathi Nayak 

OpenAI is advancing in its bid to transform the non-profit structure of the $157 billion company into a for-profit business by having preliminary discussions with regulators. 

The company is in early talks with the California attorney general’s office over the process to change its corporate structure, according to two people familiar with the matter. The 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 detailed in a letter to OpenAI. 

 

OpenAI, founded in 2015 as a nonprofit research organization 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 could open the door to questions about whether the company is upholding its original do-gooder public mission.

 

High costs 

OpenAI declined to comment on talks with regulators, but said that the nonprofit would continue to exist in any potential corporate restructure.

 

“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,” OpenAI nonprofit board chairman Bret Taylor said in a statement to Bloomberg News.

 

In 2019, OpenAI created a capped for-profit subsidiary to help fund the high costs of AI model development, and about a year after OpenAI’s Chief Executive Officer Sam Altman was fired and rehired by its former nonprofit board. Altman’s ouster followed tensions with the board over balancing AI safety with the pressure to commercialize OpenAI’s software, among other issues. 

 

Proprietary ChatGPT 

Unlike many other nonprofits, OpenAI holds incredibly valuable intellectual property in the form of its proprietary ChatGPT chatbot and related artificial intelligence technology. 

 

In California, the company has opened a dialogue with the office of Attorney General Rob Bonta and will submit the details of its restructuring plan after the proposal is finalized, according to a person who declined 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.

 

The company plans to change to a public benefit corporation, which Bloomberg previously reported. 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, according to a person familiar with the matter. 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 declined to identified.

 

What stake the nonprofit will receive in the for-profit, and how OpenAI’s assets are valued, will be key factors in regulatory approvals for the restructuring, according to legal experts.

 

“It’s not as simple as just turning off your nonprofit status,” said Daren Shaver, a San Francisco-based partner at Hanson Bridgett LLP. “Whatever value is those assets has to be properly accounted for.”

 

Intellectual property 

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, 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 complicated and drawn-out.

 

“It’s about convincing the attorney general effectively that the assets are going to the right place,” Shaver said.

 

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, the New York Times has reported.