OpenAI just cut a deal with California. Critics say it’s full of holes

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

But details of the move could revive worries that OpenAI is misusing charitable tax exemptions, experts and advocates told CalMatters. The ChatGPT maker is putting its nonprofit arm nominally in control of the for-profit entity, but there are numerous ways the for-profit company could end up calling the shots, these people said. There are also important, unanswered questions about the safeguards that are supposed to keep that from happening.

Under the restructuring, the newly-formed OpenAI Foundation will hold about 26 percent of OpenAI’s valuation, a share amounting to $130 billion, instantly making it one of the most well-endowed philanthropic organizations in the world. Microsoft, company employees, and other investors will hold the rest. The controlling nonprofit foundation can appoint members of the for-profit board of directors and, through a special committee, step in to address AI safety concerns. The company also pledged to remain 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 make artificial intelligence that benefits humanity. The company had pledged all “assets are irrevocably dedicated” to this purpose.

OpenAI has faced criticism for a wide range of impacts on society. In August, the parents of California teenager Adam Raine alleged in a lawsuit that ChatGPT coached him on how to commit suicide. The company put restrictions on its generative AI video app Sora 2 after depictions of Martin Luther King Jr were criticized as disrespectful. Lawmakers in California have also moved to mitigate rising power consumption and proliferation of data centers driven by ChatGPT and similar tools. At the same time, the company has helped drive an AI boom that has seen Big Tech companies surge money into state tax coffers.

Bonta and Jennings have both now signed agreements with OpenAI blessing its new structure.

“We will be keeping a close eye on OpenAI to ensure ongoing adherence to its charitable mission and the protection of the safety of all Californians,” Bonta wrote.

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

Bartlett said the new arrangement that the nonprofit, a minority stakeholder, will have oversight of the public benefit corporation is also unusual. He said the deal envisions a “pretty active role” for the nonprofit’s safety committee, which will include the right to control safety procedures and halt the release of AI models made by the corporation. OpenAI previously named four members of the safety committee on its website and has said all current members of the non-profit board will serve on the for-profit board, with some as observers.

But not knowing exactly how much overlap there might be between the boards of the nonprofit and the corporation is a big question, as is the ultimate composition of the committee, Bartlett said.

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

Steven Adler previously led a product safety team at OpenAI. On Tuesday he published an op-ed in the New York Times that argues that the company can’t be trusted when they say they can safely deploy erotica chatbots in part because it has a history of ignoring risks.

He told CalMatters that under the restructure that he thinks the nonprofit’s safety committee needs more independence to operate effectively. “I hope that a truly independent body will do a better job of protecting the organization’s mission than one that feels any pull toward profits,” he said.

OpenAI’s restructuring drew ire from Eyes On OpenAI, a coalition of more than 60 California nonprofit organizations who have argued for more than a year that attorneys general should force the company to transfer its assets to an independent nonprofit entity. The precedent for this approach comes from Blue Cross of California, which started as a nonprofit. Following a transfer of assets to a for-profit subsidiary in the 1990s, that organization gave more than $3 billion in stock to two foundations.

San Francisco Foundation chief Impact Officer Judith Bell, a member of the Eyes on OpenAI coalition, said the deal could set a precedent for startups to evade taxes, and is also concerned that under the restructuring the same people can serve on boards of directors for the for-profit and the nonprofit.

“There’s a bazillion conflicts of interest here,” she said, adding that those conflicts are particularly worrisome given the broad potential harms the foundation needs to keep an eye on, including how the tech impacts children, the economy, the workplace, and society.

The deal speaks to the tremendous influence of a corporation to push forward a deal, said Orson Aguilar, director of the advocacy nonprofit LatinoProsperity and a member of the Eyes On OpenAI coalition.

He believes OpenAI lost its way when key executives realized they could make an enormous amount of money for themselves.  Members of the nonprofit board, meanwhile, variously quit and lost influence after some of them attempted to oust CEO Sam Altman in 2023.

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

This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.