The ChatGPT-maker continues to face critics and a lawsuit from Elon Musk after winning over state officials.
SAN FRANCISCO — ChatGPT maker OpenAI announced a major victory on Tuesday, gaining the blessing of the attorneys general in California and Delaware to complete its controversial, multi-billion dollar business restructuring after months of intense public scrutiny.
But the dominant, San Francisco-based AI company, which is valued at $500 billion, still faces potential hurdles with continued protest from influential civil society groups and an ongoing lawsuit from former business partner turned rival Elon Musk.
OpenAI said Tuesday it had completed its restructuring to remain a nonprofit, with a more traditional for-profit arm underneath to be set up as a public benefit corporation.
The changes, which clear the way for OpenAI to receive more than $22 billion recently approved by investor SoftBank, eliminated a prior capped-profit model, while opening a path for OpenAI to raise more from investors in future funding rounds and eventually go public. Microsoft, one of OpenAI’s biggest financial backers, will have a stake in the for-profit company worth more than $130 billion and said it supports the new structure.
News of the restructuring followed agreements OpenAI reached with California and Delaware — where the company is based and incorporated, respectively — after the states had launched probes into the restructuring plan. Under the terms of the deals, the states agreed not to take the company to court or otherwise try to stop the changes.
The deals were the culmination of more than a year of work by OpenAI’s Chief of Global Affairs Chris Lehane, and a crack team of Democratic operatives he assembled to assuage the concerns of state officials, particularly in California, where the company had focused much of its lobbying efforts to secure an agreement.
Critics of the restructuring, including Musk, have pushed to stop it, arguing it strays from the nonprofit’s founding mission to ensure that in the future if AI systems become generally smarter than humans they benefit everyone. The company has countered that the changes allow it to better serve that mission amid a highly competitive global AI race.
OpenAI and Lehane had left the door open to potentially moving their operations out of California if the restructuring fell through. In what Lehane called a “carrot and bigger carrot” approach, the company also kept up a drumbeat of offering millions in grants to other nonprofits as well as sending economic reports to state officials that outlined the billions in revenue the state would lose if the company packed up. In all, they claimed California would suffer nearly $6 billion in total economic impact in 2030.
Two of the major pillars of the deal with California Attorney General Rob Bonta were a commitment from OpenAI to remain in the Golden State and grow there, as well as to make significant technical changes to its products to protect kids.
“You end up … with the nonprofit remaining in control, you end up with California being home to one of and potentially the largest nonprofit in human history,” Lehane, Bill Clinton’s former spin doctor and an Airbnb veteran with close ties to Gov. Gavin Newsom, told POLITICO. “You have real progress being made on kids’ safety, and then you have the California piece of this.”
The nonprofit, newly dubbed the OpenAI Foundation, will hold a 26 percent stake in the for-profit, which will be called OpenAI Group PBC, valued at approximately $130 billion, according to the company.
Bonta said at a press conference Tuesday in response to a question from POLITICO that his office reached the memorandum of understanding late Monday night after securing “major concessions” from OpenAI.
That document will “help them adhere to their mission going forward, ensure safety, including the safety of children going forward,” he said, adding: “We also got a commitment that they’ll stay and operate in California.”
The company’s unusual structure put it under the oversight of both Bonta and Delaware Attorney General Kathleen Jennings. Jennings had to approve the corporate structure, and Bonta’s office, which oversees state nonprofits, is charged with ensuring the company adheres to its nonprofit mission.
Civil society groups, academics and nonprofits raised alarms by regularly lobbying California officials, arguing the business changes would undermine the independence of the resources OpenAI had accrued as a nonprofit. They were also concerned that the company was not advancing its nonprofit mission.
The company in May changed its initial for-profit plans to ensure the nonprofit branch would maintain control, after consulting with Bonta and Jennings. In more recent weeks, Bonta had pressed the company for additional changes to make its technology safer for kids, following a high-profile lawsuit over California teenager Adam Raine’s use of ChatGPT before his death by suicide.
The company gave the state officials notice of its latest plans less than three weeks ago. Lehane said the final agreement came after meetings between OpenAI CEO Sam Altman and Bonta, during which the company made clear its commitment to kids’ safety and to California.
Jennings wrote in a statement Tuesday that her office had completed its review of the restructuring and didn’t object.
Altman made clear in a social media post on Tuesday that he didn’t enjoy the idea of leaving the Golden State, noting: “California is my home, and I love it here, and when I talked to Attorney General Bonta two weeks ago I made clear that we were not going to do what those other companies do and threaten to leave if sued.”
Many of OpenAI’s critics continue to oppose the restructuring despite the company’s work with state officials, and Musk’s lawsuit is expected to go to trial next year.
Lehane said he was confident the litigation would not affect the restructuring. Musk and spokespeople for his companies did not immediately respond to requests for comment.
A coalition of dozens of California nonprofits led by the San Francisco Foundation and LatinoProsperity insisted on Tuesday that Bonta and Jennings should course-correct by dissolving the OpenAI nonprofit so that its assets can be transferred to an independent entity.
The coalition, dubbed EyesOnOpenAI, commended Bonta for listening to their concerns, but said it has ongoing worries about the lack of nonprofit independence.
“We have been clear and consistent in our requests of the attorney general – a fair and independent valuation of the assets accumulated under the nonprofit and independent governance of those assets,” said Judith Bell, the chief impact officer at the San Francisco Foundation, in a statement.
“OpenAI’s new structure delivers neither. … we are disappointed in the outcome and urge AG Bonta to continue close oversight of OpenAI to ensure it lives up to its end of the bargain.”
Orson Aguilar, president and CEO of LatinoProsperity, told POLITICO on Tuesday that the new structure shouldn’t have been allowed to go forward, arguing it fails to guarantee true independence for the OpenAI nonprofit or accountability to the public.
“OpenAI wanted to get this done quickly, and clearly, the two AGs felt like they didn’t either have sufficient evidence or sufficient political will to fight this,” he said. “The main concession was just bowing to a major lobbying pressure by a $500 billion corporation. I think the fire of lawyers and what they brought to bear here was just too much for the attorneys general to handle.”
OpenAI agreed as part of its deals with California and Delaware that its nonprofit board would retain the sole authority and power to appoint directors of its for-profit board. Members of the nonprofit board and the for-profit public benefit corporation will have to meet regularly with Bonta’s staff and alert them in advance of significant changes in governance.
Civil society groups said they met with Bonta in mid-October, during which Aguilar recalled the attorney general stated his authority to sue if he was uncomfortable with OpenAI’s terms and made it clear that kids’ safety was his top priority.
While kids’ safety may have been his focus, the groups viewed it as ancillary to their overall concerns about governing and regulating OpenAI as a charitable entity.
Both attorneys general had been independently assessing the value of OpenAI’s assets as part of their investigations. Aguilar said that Bonta’s office clarified to the group Tuesday morning that it has not approved the financing arrangement that gives the nonprofit its stake in the for-profit company. Members of the coalition said they will evaluate their legal options and plan to speak with the attorneys general to further understand why they accepted the deal.
Bonta’s office said it did not approve or disapprove the transaction and the announcement Tuesday was an indication it was not suing.
“When it comes to AI generally, safety is the priority of Attorney General Bonta,” spokesperson Elissa Perez said in a statement. “Attorney General Bonta takes the obligation to protect charitable assets seriously and robustly reviewed and negotiated concessions related to this transaction; however, nothing about the MOU changes our ongoing work and concern related to safety.”
Groups also brought to his attention tactics OpenAI has been deploying to raise doubts about its critics, including subpoenas suggesting ties to Musk, which POLITICO was among the first to report.
As part of its legal battle with Musk, OpenAI sent subpoenas to groups including the San Francisco Foundation and Encode, an AI safety group that joined Aguilar’s coalition. Aguilar said Bonta was “very concerned” and said he would look into the company’s use of subpoenas against groups that have opposed the restructuring.
Nathan Calvin, Encode’s vice president of state affairs and general counsel, told POLITICO his group is still sifting through the details of the agreements, but was struck by OpenAI’s statement that all current nonprofit directors will also serve on the for-profit’s board, save one.
“Despite the language around nonprofit control, if the [public benefit corporation] board and nonprofits nearly completely overlap, what kind of control and independence from for profit influence is that really?” Calvin said.
Among other terms, a special committee within the nonprofit will oversee and be able to effectively approve the public benefit corporation’s actions related to safety and security. It will have the ability to stop the release of AI models or systems.