- There’s an important stipulation on OpenAI‘s historic $6.6 billion funding round.
- The startup has two years to become for-profit, or it might have to give investors their money back.
- The process is likely to be complicated and could involve a battle in court, legal experts said.
OpenAI’s historically large $6.6 billion funding round is bringing in checks from some of the biggest technology and venture capital investors.
But there’s reportedly one condition on the round that could undo it all.
If the ChatGPT-maker doesn’t complete its transition to a for-profit company within two years, investors in the latest round could ask for their money back, multiple outlets have said.
When it was founded in 2015, OpenAI was a nonprofit. In 2019, it added a for-profit arm to raise money, but it said it would still focus on creating safe artificial general intelligence that benefits humanity.
Then, OpenAI confirmed last month that the company would become an entirely for-profit entity over the next two years, ruffling some tech fans’ feathers.
Making that change could lead to government challenges to the process in court, Jill Horwitz, a professor at the University of California, Los Angeles School of Law, told Business Insider in an interview.
Any assets that OpenAI holds right now under its nonprofit structure are “dedicated to a charitable purpose,” Horwitz said. “Even if they’re billions of dollars, as in OpenAI, they are perpetually dedicated to those purposes.”
“Assets that are legally required to be devoted to charitable purposes do not convert to for-profit purposes,” Horwitz added. “In a sense, the for-profit needs to buy out the nonprofit interest.”
OpenAI is registered as a nonprofit in Delaware, a state where many nonprofits and for-profit companies choose to incorporate. But given OpenAI’s assets and operations in California, that state’s attorney general “has the power to ensure that charitable assets are not used for for-profit purposes,” said Horwitz.
And the Internal Revenue Service could also challenge the transition, Horwitz said.
“The regulators have a duty to protect the public interest, and the public has an interest in charitable assets remaining devoted to charitable ends,” she said.
Alexander Reid, a partner at the law firm BakerHostetler, sees OpenAI’s transition to a fully for-profit company as a complex one that could be complicated further not only by regulators but also internally.
“If one director thinks the other directors are breaching the mission and making a decision that’s not in the best interests of the nonprofit, they can sue” on behalf of the company, said Reid, who specializes in the regulation of nonprofit organizations.
The biggest obstacle for OpenAI, Reid said, will be “getting clarity about how this helps” the company’s mission “and getting unanimity and alignment on the board and with the regulators that this is the right thing to do.”
Reid said the SEC will focus on whether investors are informed of the risks, the IRS will look into whether tax laws are being followed, and the attorneys general will want to know if the transition for for-profit is fair, reasonable, and in the best interests of the nonprofit.
But “if there’s disagreement within the entity, then it’s much harder for the regulators to approve it,” he said.
Still, the legal experts said that though OpenAI’s transition to a for-profit company is a complicated one, it’s doable.
Reid said that it’s possible OpenAI can get the transition done within the two-year timeframe.
“When things are this important, you can usually get the attention of the regulators in question,” said Reid. “You can get the SEC and the IRS and the California attorney general and whoever else you might need to focus on the transaction and devote the resources to approving it in a way that more routine transactions can take longer.”
He continued, “When there’s this much market interest, and the amounts are so significant, and the government’s interest is so significant, I think you can expect things to move faster, potentially.”
“It really depends on what the regulators do,” said Horwitz.
OpenAI did not immediately respond to a request for comment.
Earlier this year, Elon Musk, a cofounder of OpenAI, sued the startup and two other cofounders, Sam Altman and Greg Brockman. Musk claimed that OpenAI wasn’t sticking to its mission as a nonprofit. Musk dropped the lawsuit in June.
Employees, board members, and others associated with OpenAI have also clashed over how quickly the company should be developing and releasing its products and what kind of oversight its technology needs. Those debates intensified after OpenAI launched ChatGPT, which attracted 100 million users in about two months, in 2022.
Last November, some members of OpenAI’s board of directors removed Sam Altman as the company’s CEO. But Altman got his job back, and two board members who argued for his ouster left their roles.
Since then, several high-level employees have left OpenAI, including some of its co-founders.
