OpenAI’s restructuring deal with California is full of holes, critics say

from Harry Johnson and Levi SumagasaiCalMatters

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OpenAI said Tuesday it will restructure itself as a for-profit company in a way that meets the concerns of California Attorney General Rob Bonta, who signed off on the transformation.

But details of the move could revive concerns that OpenAI is abusing charitable tax exemptions, experts and advocates told CalMatters. ChatGPT’s creator puts its nonprofit arm nominally in control of the nonprofit, but there are many ways the nonprofit could end up liable, these people said. There are also important unanswered questions about the safeguards that should prevent this from happening.

In the restructuring, the newly formed OpenAI Foundation will own about 26 percent of the The OpenAI assessmentshare totaling $130 billion, instantly making it one of the world’s best-endowed philanthropies. Microsoft, company employees and other investors will hold the rest. The controlling non-profit foundation can appoint members to the non-profit board of directors and, through a special committee, intervene to address AI safety concerns. The company also pledged to stay in California.

OpenAI did not respond to a CalMatters request for additional details about potential safeguards to preserve the independence of the OpenAI Foundation.

OpenAI’s plans came under scrutiny in California because Bonta, along with Delaware Attorney General Kathy Jennings, wanted to ensure the company stayed true to the mission laid out in its charter when the organization was founded as a nonprofit a decade ago to create artificial intelligence that benefits humanity. The company has promised that all “assets are irrevocably dedicated” to this end.

OpenAI has faced criticism for a wide range of impacts on society. in August the parents of California teenager Adam Rein claim in a lawsuit that ChatGPT taught him how to kill himself. The company imposed restrictions on its generative AI video app Sora 2 after images of Martin Luther King Jr were criticized as disrespectful. California Legislators have also taken mitigation measures increasing power consumption and proliferation of data centers managed by ChatGPT and similar tools. At the same time, the company helped fuel the AI ​​boom that saw big tech companies pour money into the state tax coffers.

Bonta and Jennings have already signed agreements with OpenAI blessing his new structure.

“We will be closely monitoring OpenAI to ensure continued adherence to its charitable mission and the protection of the safety of all Californians,” Bonta wrote.

Robert Bartlett, professor of law and business at Stanford Law School, has studied and worked in the venture capital ecosystem for three decades. He said that OpenAI’s start as a non-profit organization was unusual and related to its unique mission around artificial intelligence. But it was found to be a restrictive nonprofit, making it difficult to raise capital and compensate employees with equity in the company. Its restructuring should pave the way for eventuality initial public offering.

Bartlett said the new arrangement, that the nonprofit, a minority shareholder, would have oversight of the public benefit corporation is also unusual. He said the deal envisions a “quite active role” for the NGO’s safety committee, which would include the right to oversee safety procedures and stop the release of AI models made by the corporation. OpenAI earlier named four members of the safety commission on its website and has all current members said from the nonprofit board will participate in the nonprofit board, with some as observers.

But not knowing exactly how much overlap there might be between the nonprofit and corporate boards is a big question, as is the final makeup of the commission, Bartlett said.

“We’ll have to see what happens, who’s on the committee, how active (they are) and their relationship with OpenAI,” Bartlett said. “Will (the structure) be meaningful and consistent with the AG’s focus on safety?”

Steven Adler previously led the product safety team at OpenAI. On Tuesday, he published an comment in the New York Times this claims that the company cannot be trusted when they say they can safely deploy erotic chatbots partly because it has a history of ignoring the risks.

He told CalMatters that with the restructuring, he felt the nonprofit’s safety committee needed more independence to operate effectively. “I would hope that a truly independent body would do a better job of protecting the organization’s mission than one that feels some sort of profit motive,” he said.

“There are millions of conflicts of interest here.”

Judith Bell, San Francisco Foundation

OpenAI’s restructuring drew ire from The eyes of OpenAIa coalition of more than 60 California nonprofits that has argued for more than a year that attorneys general should force the company to turn over its assets to an independent nonprofit. The precedent for this approach comes from Blue Cross of California, which started as a nonprofit organization. After transferring assets to a for-profit subsidiary in the 1990s, this organization gave more than $3 billion in equity to two foundations.

Judith Bell, chief executive of the San Francisco Foundation, a member of the Eyes on OpenAI coalition, said the deal could set a precedent for start-ups to avoid taxes and was also concerned that the restructuring could have the same people serving on the boards of directors of nonprofits and nonprofits.

“There are millions of conflicts of interest here,” she said, adding that those conflicts are especially troubling given the broad potential for harm the foundation must monitor, including how technology affects children, the economy, the workplace and society.

The deal speaks to the enormous influence a corporation can have to push through a deal, said Orson Aguilar, director of the nonprofit advocacy organization LatinoProsperity and a member of the Eyes On OpenAI coalition.

He believes OpenAI lost its way when key executives realized they could make a huge amount of money for themselves. Meanwhile, the nonprofit’s board members have variously left and lost influence after some tried to oust CEO Sam Altman in 2023.

“The nonprofit continues to operate under the influence of the for-profit it supposedly controls, and that was our biggest objection, and nothing today tells us that anything meaningful has changed that,” he said.

This article was originally published on CalMatters and is republished under Creative Commons Attribution-NonCommercial-No Derivatives license.