OpenAI Announces Restructuring Plan to Create Public Benefit Corporation, Raise Capital

In a move to attract more investment as the development of artificial intelligence continues to be an expensive endeavor, OpenAI announced on Friday its plans to restructure by establishing a public benefit company. This new structure is expected to “raise more capital than it had imagined” and remove certain limitations imposed by its current nonprofit parent organization.

This confirmation follows a prior report that sparked discussions among technology leaders and corporate observers regarding the implications of such a restructuring. The main concerns revolve around whether OpenAI will allocate its assets to the nonprofit arm fairly and balance the pursuit of profit with the aim of generating social and public goods, as the company evolves in the field of artificial intelligence.

Under the proposed restructuring plan, OpenAI intends to transform its existing for-profit arm into a Delaware-based public benefit corporation (PBC). Such a structure is designed to incorporate societal interests alongside shareholder value, ostensibly allowing for the alignment of profit-making with broader social goals.

With the escalating costs related to developing artificial general intelligence, which aims to surpass human intelligence, OpenAI is looking to make strategic changes to its capital structure. Notably, during its last funding round, which raised $6.6 billion at a $157 billion valuation, conditions were set on whether OpenAI could alter its corporate structure and eliminate a profit cap for investors within two years.

The nonprofit arm of OpenAI will continue to maintain a “significant interest” in the newly-formed PBC through shares, as guided by independent financial advisors. This move is touted by OpenAI as an opportunity for the nonprofit to become one of the “best resourced nonprofits in history.”

Originally founded in 2015 as a research-focused nonprofit, OpenAI created a for-profit sector four years later to secure requisite funding needed for the resource-intensive AI development. The unique dual-structure placed control of the for-profit unit under the nonprofit, which took the spotlight last year following the temporary removal and subsequent reinstatement of CEO Sam Altman, spurred by an employee rebellion.

OpenAI expressed in a statement, “We once again need to raise more capital than we’d imagined. Investors want to back us but, at this scale of capital, need conventional equity and less structural bespokeness.” The startup is backed by Microsoft and recognizes the massive investments from leading companies in AI development, underlining the demand to stay competitive.

By pursuing a PBC model, OpenAI aims to align itself with competitors such as Anthropic and xAI, which have recently secured substantial funding via similar structures. For instance, Anthropic recently received a $4 billion investment, while xAI raised approximately $6 billion in recent equity financing.

According to industry analyst Gil Luria, “The key to the announcement is that the for-profit side of OpenAI ‘will run and control OpenAI’s operations and business.’ This is the critical step the company needs to make to continue fundraising,” although he noted this shift does not necessitate OpenAI going public.

Despite strategic intentions, OpenAI’s restructuring plan faces potential obstacles. Elon Musk, a co-founder who later left the company, filed a lawsuit against OpenAI and Altman, alleging that the startup prioritized profit over public welfare in its AI developments.

Recently, OpenAI requested a federal judge to deny Musk’s motion, putting forth communications that suggest Musk initially supported the for-profit strategy before separating from the company due to disagreements over equity and control. Moreover, Meta Platforms has reportedly urged California’s attorney general to halt OpenAI’s transition into a for-profit entity.

While becoming a benefit corporation emphasizes a commitment to balancing mission and profitability, legal experts note that this designation, such as the assurance provided by Tulane Law School’s Ann Lipton, doesn’t inherently guarantee organizations will prioritize their mission over profit. Instead, it signals a public intention without firm enforcement mechanisms, leaving shareholders with the controlling stake to influence adherence to mission objectives.