OpenAI could face a bigger problem than Elon Musk’s lawsuit against it

Elon Musk’s second lawsuit against OpenAI, which he had contributed more than $50 million to, may not be the company’s biggest problem. A much bigger threat comes from government regulation since it has more power than the future trillionaire.

According to a recent report by Fortune, if the government chooses to investigate the shift of OpenAI from a non-profit to a Public Benefit Corporation, there will be severe repercussions.

As OpenAI shifts from being a non-profit organization to a company seeking to create returns for its investors, it may find itself under pressure to explain its compliance with non-profit principles. According to tax policy expert Luís Calderón Gómez, OpenAI’s biggest problem should be this restructuring, not Musk’s lawsuit.

OpenAI’s dual model has sparked controversies

OpenAI’s board chair, Bret Taylor, has said that the nonprofit will fulfill its duties so that the company can continue to do well and serve its purpose. Taylor also said that if there is any restructuring, the nonprofit will ensure that it gets a fair value for its interest in the for-profit entity, OpenAI Global which is currently valued at $157 billion.

OpenAI’s organizational form is a dual model, which was first applied in the healthcare industry to help ailing clinics join forces with for-profit companies without losing non-profit ownership.

This has caused controversy because some nonprofits have been said to be making more money than they are spending on the needy. Critics say that governance problems emerge because the public continues to see nonprofit organizations as small-scale charitable organizations that cannot manage billions of dollars in assets and partnerships.

OpenAI’s commercial wing is the most valuable at $157 billion while the non-profit wing has $21 million in assets.

The developer of GPT models is backed by major companies like Microsoft, Khosla Ventures, and Reid Hoffman bringing its valuation to $157 billion.

The nonprofit organization was founded to promote AI for humanity with no financial barriers but has since turned towards the commercial side of the business and this has brought some doubts about the organization’s commitment to the cause. Elon Musk, who cut off relations with OpenAI in 2019, has called the move a betrayal, comparing it to a rainforest conservation charity deciding to make money by cutting trees.

Sam Altman, the chief executive officer of OpenAI, supports this change arguing that the company needs to collect more funds to support its operations.

However, critics have expressed fear that this move may encourage other startups to exploit the tax-exempt status before they convert to for-profit entities. Altman said that OpenAI did not create a dangerous precedent as the company had no choice due to increasing costs.

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