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OpenAI Abandons Planned For-Profit Conversion

The maker of ChatGPT said it made the decision to remain under the control of a nonprofit organization.

OpenAI CEO Sam Altman attending an event in Paris earlier this year. PHOTO: NATHAN LAINE/BLOOMBERG NEWS

OpenAI CEO Sam Altman attending an event in Paris earlier this year. PHOTO: NATHAN LAINE/BLOOMBERG NEWS

Key Points

  • OpenAI abandons plan to change the entity controlling its AI business, leaving power with the same body that ousted Altman in 2023.
  • The change would have converted OpenAI to a public-benefit corporation while preserving a nonprofit to control the company.
  • OpenAI decided to scrap the plan after discussions with civic leaders and Attorneys General of California and Delaware.

OpenAI abandoned a controversial effort to place its juggernaut artificial-intelligence business under control of a for-profit entity and will instead remain under its founding nonprofit board.

The move could complicate the company’s future fundraising efforts. Unlike traditional boards, which must act in the best interest of shareholders, OpenAI’s nonprofit board has a fiduciary duty “to humanity.”

OpenAI started work on a change to its business structure after CEO Sam Altman’ssurprise firing and reinstatement in 2023. Its big investors, including Microsoft, watched his temporary ouster from the sidelines, unable to wield official power over the outcome.

The conversion would have changed OpenAI’s business to a public-benefit corporation, while preserving some form of the current nonprofit that controls the company. Altman’s rival, estranged co-founder Elon Musk, had tried to block the conversion in court.

OpenAI said it scrapped the bolder plan after discussions with civic leaders and the attorneys general of California and Delaware, who would be required to sign off on it. The company will instead transform its for-profit subsidiary into a public-benefit corporation that is controlled by the nonprofit parent, the company said Monday.

The change is a win for Musk and other OpenAI critics who believed that the company had strayed too far from its founding altruistic mission. OpenAI’s ChatGPT has become a lead contender in the global AI race, amassing hundreds of millions of users.

OpenAI has a content-licensing deal with The Wall Street Journal’s parent company, News Corp.

Altman said during a press conference Monday that the new plan creates a more understandable structure. “This is maybe less eventful than people were expecting,” he said.

During its fundraising efforts over the past year, OpenAI has dangled the promise of its imminent conversion to a more traditional structure to entice investment. The terms of its fundraising from some investors required OpenAI to successfully restructure in order to receive the full amount raised.

Altman said the changes proposed Monday would still allow it to access a $30 billion chunk of investment from SoftBank, which had been dependent upon the successful restructuring. A representative for SoftBank didn’t immediately respond to a request for comment.

The move is a win for Musk, who runs a rival AI company and has sued OpenAI over various issues for more than a year. Musk sued to block OpenAI’s conversion to a for-profit company and put together a consortium of investors to make a bid for OpenAI, which OpenAI rejected.

“This changes nothing,” Marc Toberoff, Musk’s lead counsel in his suit against OpenAI, calling the move a “cosmetic restructuring” that converts charitable assets into private billions. “The founding mission remains betrayed.”

From its founding in 2015, OpenAI prided itself on its eccentric governance structure, in which a nonprofit board with a fiduciary duty “to humanity” oversaw a research lab that grew into the leader of the AI revolution.

When it became clear that it was going to need more money than its founders thought, OpenAI created a limited liability company subsidiary that would allow it to take investment from big tech companies such as Microsoft. These investors’ returns would be capped at 100 times what they put in, and could fall to zero if the nonprofit board deemed it was necessary to support its mission.

In the new structure proposed Monday, the “capped-profit” LLC would be replaced by a public-benefit corporation, which would serve both a public mission and investors. In a note to employees Monday, Altman said public-benefit corporations have become typical for AI companies such as its rivals, Anthropic and Musk’s X.ai.

OpenAI Board Chairman Bret Taylor said during Monday’s press conference that the new structure would be simpler and allow employees, investors and the nonprofit to own parts of the public-benefit corporation.

He declined to say how large of a stake the nonprofit would have in the public-benefit corporation. The potential size is being studied by independent financial advisers.

Altman said he expects the moves to result in the nonprofit being one of the largest and best-capitalized charities in the world.

“It also means we can start deploying capital from the nonprofit very soon, which we’re thrilled to do,” Altman said. “We’ve got a long list of things that we think will be very impactful.”

Write to Keach Hagey at Keach.Hagey@wsj.com

Author: Keach Hagey

Source: WSJ:

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