Monday, February 20, 2023

Elon Musk And CHatGPT Agree: OpenAI should not be Tax Exempt


Elon Musk, an early donor to OpenAI, asked CHatGPT whether OpenAI qualifies as a tax exempt entity.  CHatGPT said "no."   

I wonder if ChatGPT, the AI chatbot developed by tax exempt OpenAI will learn how to lie, cheat and steal like most humans.  I mean, if artificial intelligence is anything like real human intelligence, ChatGPT will inevitably learn the short and long term utility of all the sinister schemes and obfuscations we humans engage in so well.  Because its gonna have to lie, cheat, or steal, to conclude that OpenAI should still be tax exempt. 

We blogged about ChatGPT a few weeks ago, here and here.  In those posts, we speculated that OpenAI was not just pushing the technology envelope.  It is also boldly going -- like Cpt. Kirk and Spock -- to  places tax exemption jurisprudence has never gone before.  Here's the recap:  OpenAI began as an  exempt organization in 2015, reportedly taking in $1 billion U.S. in start-up capital portrayed, apparently, as charitable contributions from Elon Musk, Peter Thiel and other well known money bags.  A mere four years later, right about the time ChatGPT started showing promise, OpenAI flung its entire self headlong in a limited partnership with OpenAI LP.   I am pretty sure OpenAI, LP is officially known as OpenAI Startup Fund I, L.P.  Because two years after that, OpenAI Startup, filed a "Notice of Exempt Offering of Securities." 

Now sit still and pay attention, because this here is where the ice starts getting thinner.  The leading Supreme Court opinion established the Howey test:  a security is an investment of money in a common enterprise with the expectation of earning a profit solely through the efforts of the promoter or some one other than the investors.  By the way, OpenAI Startup candidly describes itself as a "venture capital fund" in its Form D.  Everybody knows VC funds exist not just to make money, but to distribute money too.  That makes sense because if nobody stands to profit, there would be no need to register with the SEC, or even explain why registration is not required.  The securities laws regulate the marketing of profit making investments.  And just as an additional tidbit that needs following up, the provision under which OpenAI Start Up claims exemption from registration hinges on the requirement that interests are offered only to very sophisticated investors or entities described in 501(c)(3).  I am not a Securities Law expert but I have been drafted into teaching the subject once or twice before.  I hated it then but I love it right about now.  

One exemption, Sec 3(a)(4) 1933 Securities Act, allows issuance of unregistered securities (seems crazy right?) if the issuer is:

organized and operated exclusively for religious, educational, benevolent, fraternal, charitable, or reformatory purposes and not for pecuniary profit, and no part of the net earnings of which inures to the benefit of any person, private stockholder, or individual, or any security of a fund that is excluded from the definition of an in- vestment company under section 3(c)(10)(B) of the Investment Company Act of 1940;

Rule 506(c), explicitly claimed by OpenAI Startup, exempts an offering if the issuer takes certain steps to assure itself that all investors are accredited.  A 501(c)(3) with more than $5 million in assets is an accredited investor.  Perhaps as a backup to that exemption, OpenAI Start-up also claimed the exemption under Section 3(c)(7) (but not 3(c)(10) which applies to a 501(c)(3) issuer) of the Investment Company Act. 

In either case, it sounds to me like the truthful disclosures mandated by our securities laws are relaxed somewhat when the issuer wears a halo.  And one of the ways a nonprofit earns its halo is by complying with that nasty tasting phrase, "the nondistribution constraint," aka the prohibition against private inurement and excess benefit.  And well, like I explained in the two earlier posts linked at the top of this report, I am just not sure that is the case with regard to this securities offering.  I am not sure OpenAI still qualifies as a 501(c)(3) ever since it entered into a joint venture with a bunch of accredited investors (people who are putting money in to get a profit out, do I really need to spell this out?!).  If OpenAI does not qualify under 501(c)(3), everybody better get the securities people at Akin working again, not to mention the tax people.

The PR department of OpenAI's Geek Squad is on its job though.  "Move along folks, nothing to see here."  According to OpenAI, the accredited investors are only going to get some of the profit, not all of the profit.  The rest is going into the charitable mission. That's why they are calling the limited partnership company a "capped profit" entity.  The PR even cites a provision of the limited partnership operating agreement, "See Section 6.4. for additional details;" it says that exactly, that's why its in quotes.  That provision purports to guarantee that the limited partnership will be managed by the exempt organization solely in the pursuit of the charitable mission.  Just to make sure of that, they say, investors have agreed to take profits from our operations only after we, the exempt general partner with majority governing rights over the limited partnership, deem the charitable mission complete (on a year by year basis, apparently).  

The only problem is that I can't find anybody willing to let me see the operating agreement.  The press release instructs us taxpayer investors to read paragraph 6.4 thereof.  So I called OpenAI and got no answer.  I asked them via Twitter for a copy of the operating agreement and got no response.  I sent their PR people an email.  I even wrote to every person at Akin Gump listed as working on the Microsoft part of the deal for a copy.  I asked them to send me a copy.  You think the Akin Gump folks mighta lost it or something? Crickets is all I got, even when I mentioned that the Press Release instructs me to read paragraph 6.4.  Oh didn't I mention?  Microsoft has found a charitable itch, apparently, and has agreed to invest another $1 billion in the joint venture, this time on an "exclusive" basis.  From the press release

Today, we are announcing the third phase of our long-term partnership with OpenAI through a multiyear, multibillion dollar investment to accelerate AI breakthroughs to ensure these benefits are broadly shared with the world.

This agreement follows our previous investments in 2019 and 2021. It extends our ongoing collaboration across AI supercomputing and research and enables each of us to independently commercialize the resulting advanced AI technologies.

    • Supercomputing at scale – Microsoft will increase our investments in the development and deployment of specialized supercomputing systems to accelerate OpenAI’s groundbreaking independent AI research. We will also continue to build out Azure’s leading AI infrastructure to help customers build and deploy their AI applications on a global scale.
    • New AI-powered experiences – Microsoft will deploy OpenAI’s models across our consumer and enterprise products and introduce new categories of digital experiences built on OpenAI’s technology. This includes Microsoft’s Azure OpenAI Service, which empowers developers to build cutting-edge AI applications through direct access to OpenAI models backed by Azure’s trusted, enterprise-grade capabilities and AI-optimized infrastructure and tools.
    • Exclusive cloud provider – As OpenAI’s exclusive cloud provider, Azure will power all OpenAI workloads across research, products and API services.

“We formed our partnership with OpenAI around a shared ambition to responsibly advance cutting-edge AI research and democratize AI as a new technology platform,” said Satya Nadella, Chairman and CEO, Microsoft. “In this next phase of our partnership, developers and organizations across industries will have access to the best AI infrastructure, models, and toolchain with Azure to build and run their applications.” The past three years of our partnership have been great,” said Sam Altman, CEO of OpenAI. “Microsoft shares our values and we are excited to continue our independent research and work toward creating advanced AI that benefits everyone."

I think its a Freudian slip, but the press release using the key words in contention:  "commercialize," "advance" and "democratize."  Can the first co-exist with the second and third goals?  Right now, I would give much better than even money that OpenAI, Inc. no longer qualifies or should qualify as an exempt organization because of its new "capped profit" gambit with Open AI LP.  I think Elon Musk agrees with me, though he doesn't quite know right words to say so.  That guy will never make it in this world.  Anyway, they don't have to give me the operating agreement.  Mama used to say, "what's done in the dark always comes out in the light."  

darryll jones

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Can you post the 990 for OpenAI for the part few years?

Posted by: Betsy | Nov 22, 2023 6:30:37 AM

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