OpenAI’s Back Door Private Inurement is a Bridge Too Far

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I’ve gone back and forth on whether OpenAI, the tax exempt research organization that developed ChatGPT, should retain its tax exemption. You may recall that the effective altruists dropped their entire operation into a joint venture with a bunch of private investors whose returns are “capped” at 100x.  I am not sure if that means investors can earn 100 times their investment or 100% of their investment but either way it didn’t prevent me from concluding that the private benefit to investors is tolerable and therefore would not jeopardize OpenAI’s 501(c)(3) status.    The “charitalists” were doing no more than if they borrowed money from a bank to finance the operations.  In other words, if the market requires financing through a joint venture to achieve the charitable purpose than so be it.  

But that conclusion rests on the assumption that the investors are not insiders and therefore cannot operate the charity in a manner that increases their profits from the tax subsidized entity. Rather than in pursuit of the charitable purpose.  As outsiders, their profit taking is excluded from the prohibition against private inurement and excess benefit by the “first bite” exception.  Its only a private benefit problem and that requires a weighing of the public benefit against the private gain.  

But now the insiders are getting stupid and greedy and I am gonna have to revise my article.  According to the Wall Street Journal, the insiders are now cashing in through what looks like a back door strategy.  And that is a whole ‘nother problem.  Because private benefit is inevitable — there has to be private benefit to get public benefit — and theoretically can be sufficiently regulated in arms-length transactions.  Private inurement is a different problem because insiders are self-regarding.  They are only human.  The WSJ reports that OpenAI LP — the joint venture — is about to go public with a stock sale.  Meaning it will likely register with the SEC, and thereafter stockholders will offer shares to the public.  So far, predictions are that the sale will pull in upwards of $90 billion.  And here is the rub.  OpenAI fiduciaries — those who are charged with controlling the joint venture so that it pursues charity rather than profit — are compensated via stock in OpenAI LP.  So the more profitable the joint venture, the higher the stock price.  Viola!  Roundabout private inurement resulting in and from a rather obvious conflict of interest between pursuit of the charitable purpose or pursuit of insider profit.  And that is a bridge too far.

darryll k. jones