The nonprofit’s ownership stake in the for-profit business is a key factor in regulatory approvals.

OpenAI is moving forward in its attempt to transform the $157 billion company’s nonprofit structure into a for-profit business by having preliminary discussions with regulators.

The company is in preliminary talks with the California attorney general’s office about the process of changing its corporate structure, according to two people familiar with the matter. The process will likely involve regulators examining how OpenAI values ​​a highly lucrative portfolio of intellectual property, such as its ChatGPT app.

The Delaware Attorney General also communicated about the shift from nonprofit to for-profit organizations, as detailed in a letter to OpenAI.

OpenAI, founded in 2015 as a nonprofit research organization with the idealistic mission of building artificial intelligence that would be safe and beneficial to humanity, is planning a significant shift toward a more conventional for-profit structure. A simplified for-profit structure is seen as more attractive to investors, although it could open the door to questions about whether the company is living up to its original public mission of benevolence.

High costs

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

“While our work continues and we continue to consult with independent financial and legal advisors, any potential restructuring would ensure that the nonprofit organization continues to exist and thrive and receives the full value of its stake “currently in the for-profit OpenAI organization with an increased capacity to continue its mission,” said Bret Taylor, chairman of the board of directors of the non-profit OpenAI, in a statement to Bloomberg News.

In 2019, OpenAI created a capped for-profit subsidiary to help finance the high costs of developing AI models. In 2023, Sam Altman, CEO of OpenAI, was fired and rehired by his former nonprofit board. Altman’s ouster follows tensions with the board over balancing AI safety and pressure to commercialize OpenAI’s software, among other issues.

Proprietary ChatGPT

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

In California, the company has started a dialogue with Attorney General Rob Bonta’s office and will submit details of its restructuring plan once 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 that he was “committed to protecting charitable assets for their intended purposes,” without commenting on discussions with OpenAI.

The company plans to transform itself into a public benefit corporation, as Bloomberg previously reported. The move will allow it to maintain its mission of social good while operating as a for-profit company, Jason Kwon, OpenAI’s chief strategy officer, told employees at a staff meeting in late September, according to a person familiar with it. of the file. Kwon told employees that this new structure would preserve a nonprofit arm that would own a significant portion of the for-profit entity, said the person, who declined to be identified.

Legal experts say the ownership stake the nonprofit will receive in the for-profit company and how OpenAI’s assets will be valued will be key factors in regulatory approvals for the restructuring.

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

Intellectual property

The process in California, which would involve going back and forth with Bonta’s office, can typically take a few months for a regular nonprofit, Shaver said. But because California law requires that any value assigned to nonprofit assets be distributed to a charitable cause — and OpenAI’s primary asset is its intellectual property — the review could be complicated and time-consuming.

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

Delaware Attorney General Kathleen Jennings asked OpenAI in an Oct. 9 letter to submit its conversion plans, once developed, for review by attorneys in the Division of Fraud and Criminal Investigation. consumer protection from his office.

OpenAI’s conversion would also require follow-up with the Delaware and California secretaries of state on certain procedures as well as state and federal tax authorities.

Under the terms of its latest investment round, OpenAI’s recent funding could turn into debt if the restructuring does not take place within two years, the New York Times reported.

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