OpenAI’s Path to Become a For-Profit Company Is Complicated

[00:00:18] [SPEAKER_04]: Welcome to Tech News Briefing. It's Tuesday, October 1st. I'm Zoe Thomas for The Wall Street

[00:00:24] [SPEAKER_04]: Journal.

[00:00:25] [SPEAKER_04]: A California bill that pitted some of the biggest tech companies against prominent

[00:00:30] [SPEAKER_04]: scientists who developed artificial intelligence has been vetoed. We'll tell you why Governor

[00:00:35] [SPEAKER_04]: Gavin Newsom didn't sign it and what's next for regulating AI.

[00:00:40] [SPEAKER_04]: And then,

[00:00:41] [SPEAKER_04]: The mission of a non-profit and the goals of investors don't always line up. In a few

[00:00:46] [SPEAKER_04]: years, open AI may no longer need to worry about that. We'll explain the changes it

[00:00:51] [SPEAKER_04]: plans to make.

[00:00:56] [SPEAKER_04]: But first,

[00:00:57] [SPEAKER_04]: California Governor Gavin Newsom has vetoed a controversial AI safety bill. The bill would

[00:01:03] [SPEAKER_04]: have required developers of large AI models to take steps to ensure their technology didn't

[00:01:09] [SPEAKER_04]: pose a quote, unreasonable risk of causing or materially enabling a critical harm. Developers

[00:01:15] [SPEAKER_04]: also needed to ensure their AI could be shut down by a human if it started behaving dangerously.

[00:01:22] [SPEAKER_04]: Had the governor signed the bill into law, it would have laid the groundwork for how

[00:01:26] [SPEAKER_04]: AI is regulated across the country, since so many of the top AI companies are based in

[00:01:31] [SPEAKER_04]: California. Here to tell us about the decision is our AI editor, Ben Fritz.

[00:01:36] [SPEAKER_04]: So Ben, what did Governor Gavin Newsom say his reason was for vetoing the bill?

[00:01:41] [SPEAKER_00]: Newsom said that he was concerned that the bill only applies to the biggest and most

[00:01:46] [SPEAKER_00]: expensive AI models, doesn't apply to smaller ones, and doesn't differentiate between whether

[00:01:52] [SPEAKER_00]: they're doing critical work or, you know, that really could affect people's lives in

[00:01:57] [SPEAKER_00]: a dangerous way and, you know, sensitive data and so on. Or if it's doing pretty banal

[00:02:02] [SPEAKER_00]: work. He was saying basically size and cost is not the right way to determine which AI

[00:02:06] [SPEAKER_00]: models should be regulated. And he wants something more comprehensive and more targeted based

[00:02:12] [SPEAKER_00]: on the danger they would pose.

[00:02:13] [SPEAKER_04]: A lot of research scientists supported this bill. How are they reacting to the veto?

[00:02:19] [SPEAKER_00]: They're mostly reacting poorly. Interestingly, a lot of the scientists who have developed

[00:02:23] [SPEAKER_00]: advanced AI are the people who are most worried that it could get out of control and cause

[00:02:28] [SPEAKER_00]: real danger to our economy and to our society.

[00:02:31] [SPEAKER_00]: And that's why you saw some of the most well-known, most famous, most accomplished

[00:02:35] [SPEAKER_00]: research scientists calling for more regulation.

[00:02:37] [SPEAKER_00]: They're worried that the technology they've helped develop can do things that humans

[00:02:42] [SPEAKER_00]: don't intend for it to do.

[00:02:43] [SPEAKER_04]: How are the companies behind these big AI models reacting?

[00:02:47] [SPEAKER_00]: Perhaps not surprisingly, most of the AI companies were opposed to this bill.

[00:02:51] [SPEAKER_00]: OpenAI, Google, Meta, Microsoft, they all opposed this.

[00:02:56] [SPEAKER_00]: They've also they are in favor of regulation, just not this regulation.

[00:02:59] [SPEAKER_00]: And they want to see regulation that's more specific.

[00:03:02] [SPEAKER_00]: They said this was too vague and would have been impossible to execute in practice.

[00:03:07] [SPEAKER_00]: So they've all praised the governor for this veto.

[00:03:10] [SPEAKER_00]: And they had been lobbying him pretty aggressively to veto the bill.

[00:03:13] [SPEAKER_04]: I mentioned that had this bill been signed into law, it would have had national

[00:03:17] [SPEAKER_04]: implications. But what efforts have been seen on a national level to get AI regulation

[00:03:23] [SPEAKER_00]: passed? There's been talk and hearings and meetings in Washington about the danger

[00:03:28] [SPEAKER_00]: AI could pose if it were to get out of control of its designers, if it were to mishandle

[00:03:34] [SPEAKER_00]: sensitive data or something like the electrical grid or health care records.

[00:03:38] [SPEAKER_00]: But perhaps unsurprisingly, given the paralysis in Washington, they haven't passed any

[00:03:43] [SPEAKER_00]: bills. I should add the only thing that's happened is the Biden administration has

[00:03:47] [SPEAKER_00]: implemented some guidelines that some AI companies have agreed to, but they're all

[00:03:52] [SPEAKER_04]: voluntary. Do we know how California state Senator Scott Weiner feels about the bill

[00:03:56] [SPEAKER_04]: being vetoed? He was the sponsor of the bill.

[00:03:59] [SPEAKER_00]: Weiner was pretty upset that Newsom vetoed it and he described it as a, I'll quote him

[00:04:05] [SPEAKER_00]: here, a setback for everyone who believes in oversight of massive corporations that

[00:04:10] [SPEAKER_00]: are making critical decisions that affect the safety and welfare of the public and the

[00:04:13] [SPEAKER_00]: future of the planet. He basically believes that even if this bill was imperfect, it was

[00:04:18] [SPEAKER_00]: better to pass this and then continue to refine it in the future rather than leave AI

[00:04:23] [SPEAKER_00]: pretty much unregulated, at least in the short term.

[00:04:27] [SPEAKER_04]: So what do we expect comes next?

[00:04:29] [SPEAKER_04]: Will another California bill be in the works?

[00:04:31] [SPEAKER_00]: Quite possibly. The governor said he wants to see new legislation next year that's more

[00:04:36] [SPEAKER_00]: targeted at AI models that are particularly dangerous.

[00:04:39] [SPEAKER_00]: And he announced that he's working with some top AI researchers, including Fei-Fei Li,

[00:04:45] [SPEAKER_00]: who a lot of people have called the godmother of AI, to develop new legislation that he

[00:04:50] [SPEAKER_00]: hopes will pass next year.

[00:04:52] [SPEAKER_00]: He's hoping that any future bills will have more buy in from companies and researchers

[00:04:57] [SPEAKER_00]: and everybody as opposed to being as controversial and divisive as this bill ended up

[00:05:02] [SPEAKER_00]: being.

[00:05:02] [SPEAKER_04]: That was WSJ AI editor Ben Fritz.

[00:05:06] [SPEAKER_04]: Coming up, OpenAI's path to change its structure is enormously complex and comes with a

[00:05:12] [SPEAKER_04]: deadline to get it done.

[00:05:14] [SPEAKER_04]: We'll tell you about the plan after the break.

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[00:05:38] [SPEAKER_03]: visit Amazon.com slash WSJ.

[00:05:41] [SPEAKER_03]: That's Amazon.com slash WSJ.

[00:05:50] [SPEAKER_04]: OpenAI is going through some major changes.

[00:05:53] [SPEAKER_04]: It's planning to convert from a nonprofit organization to a for-profit one.

[00:05:58] [SPEAKER_04]: The change is connected to efforts to raise $6.5 billion from backers, including

[00:06:03] [SPEAKER_04]: Microsoft, NVIDIA and venture capital firms.

[00:06:07] [SPEAKER_04]: And while the idea is to simplify the world's leading artificial intelligence startup, the

[00:06:12] [SPEAKER_04]: actual transformation will be complex.

[00:06:15] [SPEAKER_04]: Here to tell us more is our reporter Tao Francis.

[00:06:18] [SPEAKER_04]: And just before we get into this, I want to note for our listeners that The Wall Street

[00:06:21] [SPEAKER_04]: Journal's owner News Corp has a content licensing partnership with OpenAI.

[00:06:26] [SPEAKER_04]: So Tao, what is OpenAI's current structure?

[00:06:29] [SPEAKER_04]: Because it's a little unusual.

[00:06:30] [SPEAKER_01]: It is unusual. At the very top of the heap is a nonprofit, a charity.

[00:06:36] [SPEAKER_01]: It's a Delaware entity, so it's incorporated in Delaware and has ink on the end of it,

[00:06:40] [SPEAKER_01]: OpenAI ink.

[00:06:41] [SPEAKER_01]: But it's a charity. It's registered with the IRS.

[00:06:44] [SPEAKER_01]: You can give money to it and get a tax deduction.

[00:06:47] [SPEAKER_01]: And it owns everything we know of as OpenAI, with a little bit of an exception around the

[00:06:53] [SPEAKER_01]: edges. But essentially it controls the company that makes ChatGPT and that has all these

[00:06:59] [SPEAKER_01]: deals with Microsoft and is getting so much attention.

[00:07:03] [SPEAKER_04]: So the charity, the nonprofit, owns this for-profit arm that is making so much money.

[00:07:09] [SPEAKER_04]: How is it planning to restructure?

[00:07:12] [SPEAKER_01]: Well, the goal is to get the nonprofit out of the decision making and the control kind of

[00:07:17] [SPEAKER_01]: structure. The problem with having a nonprofit in control is that it's very clear that its

[00:07:22] [SPEAKER_01]: nonprofit mission, which is essentially to bring AI to the world and to everybody in a safe

[00:07:26] [SPEAKER_01]: way, isn't necessarily going to be the same as an investor's goal, which is to make money on

[00:07:33] [SPEAKER_01]: this AI boom.

[00:07:34] [SPEAKER_01]: And so the question has been for a long time how to square that circle.

[00:07:39] [SPEAKER_01]: There does seem to be some indication that the nonprofit will own a stake in it.

[00:07:43] [SPEAKER_01]: But the idea is that it won't control this sort of newly independent for-profit.

[00:07:49] [SPEAKER_01]: And other investors then will have an opportunity to buy into it.

[00:07:53] [SPEAKER_01]: And that's the $6.5 billion investment they're hoping to raise.

[00:07:58] [SPEAKER_01]: That structure isn't exactly clear.

[00:08:00] [SPEAKER_01]: We know the broad outlines.

[00:08:01] [SPEAKER_01]: We know what kind of they're hoping to do.

[00:08:03] [SPEAKER_01]: But there's a lot that has to happen between now and then.

[00:08:06] [SPEAKER_04]: What is involved in this conversion?

[00:08:08] [SPEAKER_01]: What's involved in this conversion is nonprofit law.

[00:08:11] [SPEAKER_01]: Fundamentally, charities are not owned and controlled by the people who set them up or even

[00:08:16] [SPEAKER_01]: really the people who donate money to them.

[00:08:18] [SPEAKER_01]: They are independent entities and they have an obligation to society under law.

[00:08:24] [SPEAKER_01]: Essentially, what goes into a nonprofit can't be taken out for anyone's gain.

[00:08:30] [SPEAKER_01]: And that would include investors in this new entity.

[00:08:32] [SPEAKER_01]: So right now, OpenAI, the nonprofit, owns, has control over the for-profit.

[00:08:40] [SPEAKER_01]: That's valuable.

[00:08:41] [SPEAKER_01]: That controlling an entity has some kind of value.

[00:08:45] [SPEAKER_01]: Putting a dollar figure on it isn't so easy.

[00:08:46] [SPEAKER_01]: But that value, whatever it is, has to remain with the charity.

[00:08:51] [SPEAKER_01]: The charity can't end up at the end of this process with less than it has now in terms of

[00:08:59] [SPEAKER_01]: value. Putting a value on that is difficult, right?

[00:09:02] [SPEAKER_01]: Investors might be willing to plow a certain amount of money into the for-profit.

[00:09:07] [SPEAKER_01]: That might imply a certain valuation.

[00:09:10] [SPEAKER_01]: But what the charity gets fundamentally has to keep it whole or maybe even make it a little

[00:09:16] [SPEAKER_01]: better off. It can't leave it worse off financially.

[00:09:20] [SPEAKER_04]: An OpenAI spokeswoman declined to comment for this story.

[00:09:23] [SPEAKER_04]: But what is OpenAI saying about these changes?

[00:09:26] [SPEAKER_01]: OpenAI is not giving sort of the full picture that you might expect from a prospectus and a

[00:09:31] [SPEAKER_01]: public offering or something like that.

[00:09:33] [SPEAKER_01]: So we have a lot fewer details here than we would in a sort of a more traditional

[00:09:37] [SPEAKER_04]: transaction. What's the likely timeline for this change?

[00:09:42] [SPEAKER_01]: OpenAI has a bit of a deadline.

[00:09:44] [SPEAKER_01]: It has told investors that it's going to create or transform the business into what's called a

[00:09:50] [SPEAKER_01]: public benefit corporation.

[00:09:52] [SPEAKER_01]: That's a for-profit entity that has also got some sort of a social or, you know, mission to do

[00:09:58] [SPEAKER_01]: good in the world. But it's still a for-profit entity and still delivering profits to

[00:10:02] [SPEAKER_01]: investors. OpenAI has said that it will do this within two years.

[00:10:07] [SPEAKER_01]: Otherwise, investors can get their money back.

[00:10:09] [SPEAKER_01]: The implication is they can't for two years.

[00:10:12] [SPEAKER_04]: Do we know what's going to happen to the nonprofit arm after these changes?

[00:10:17] [SPEAKER_01]: Well, we understand it's going to continue.

[00:10:19] [SPEAKER_01]: There will still be a nonprofit OpenAI, whether it keeps that name or not.

[00:10:23] [SPEAKER_01]: And it will have whatever assets, whatever value securities or cash is received for its

[00:10:29] [SPEAKER_01]: control of the current for-profit entity and for whatever else it may give up and whatever

[00:10:34] [SPEAKER_01]: ownership stake or other benefits it may give up.

[00:10:37] [SPEAKER_01]: We don't know exactly what it's going to do.

[00:10:38] [SPEAKER_01]: We're told it's going to continue to pursue its mission.

[00:10:40] [SPEAKER_01]: But whether that's by doing research or by making grants is less clear.

[00:10:46] [SPEAKER_04]: Are there other hurdles OpenAI will have to contend with to make this change?

[00:10:51] [SPEAKER_01]: Well, one of them is named Elon Musk.

[00:10:53] [SPEAKER_01]: He's already suing the company over what he has described as the abandonment of its

[00:10:58] [SPEAKER_01]: nonprofit mission.

[00:11:00] [SPEAKER_01]: OpenAI created a for-profit arm to house its research and investments it receives and

[00:11:07] [SPEAKER_01]: development and so on.

[00:11:08] [SPEAKER_01]: And he's already sued and said, OpenAI, you're doing it wrong.

[00:11:12] [SPEAKER_01]: He's already tweeted that converting to a for-profit company is inappropriate.

[00:11:16] [SPEAKER_01]: So we'll see what happens there.

[00:11:18] [SPEAKER_01]: It has gotten easier in recent years for donors, and Musk was a major donor early in

[00:11:23] [SPEAKER_01]: OpenAI's existence.

[00:11:25] [SPEAKER_01]: It's become easier for donors to go to court and argue that a nonprofit isn't doing it

[00:11:33] [SPEAKER_01]: right.

[00:11:33] [SPEAKER_01]: That said, donors don't have some kind of absolute right to determine how their money

[00:11:39] [SPEAKER_01]: is used once they give it to a nonprofit.

[00:11:41] [SPEAKER_01]: We'll see whether legal challenges become a bigger obstacle or whether they remain a

[00:11:46] [SPEAKER_01]: side channel.

[00:11:47] [SPEAKER_04]: All right. That was our reporter Tao Francis.

[00:11:50] [SPEAKER_04]: And that's it for Tech News Briefing.

[00:11:52] [SPEAKER_04]: Today's show was produced by Julie Chang with supervising producer Melanie Roy.

[00:11:57] [SPEAKER_04]: I'm Zoe Thomas for The Wall Street Journal.

[00:11:59] [SPEAKER_04]: We'll be back this afternoon with TNB Tech Minute.

[00:12:02] [SPEAKER_04]: Thanks for listening.