PUBLIC BENEFIT AND PRIVATE PROFIT

Abstract

OpenAI, Inc. has finally confirmed that it will sell the technology transfer side of its tax-exempt operations to a public benefit corporation.  It will retain the research and development side and continue as a tax-exempt scientific research organization with a stake in the PBC.  Although OpenAI describes the new structure as an “evolution,” it is more likely a failure of the fantasy that altruism and profit-taking can coexist in an exempt charity.  The fantasy is implicit in Revenue Ruling 98-15, the landmark memorandum allowing exempt organizations to enter partnerships with for-profit organizations so long as altruism is the partnership’s raison d’etre. Now is a good time to consider the age-old question whether altruism and profit-making can ever really coexist.  If coexistence is possible, it should have happened in OpenAI’s joint venture with Microsoft because altruists and investors sacrificed hardly anything. In the early start-up stage, public benefit and private investment were mutually dependent rather than mutually exclusive.

Nevertheless, CEO Sam Altman expressed regret about ever even organizing as a tax-exempt organization. OpenAI’s board has stated that there is insufficient donative or investor capital to continue research, development and technology transfer via a joint venture operated for public benefit.  That seems especially surprising because there was no real limit on ROI, unless one thinks 10,000% commonplace.  Investors in OpenAI’s joint venture were entitled to that much as an unreachable maximum and yet they forced OpenAI to shed its exempt status.  Why wouldn’t investors tolerate altruism over private profit even in the absence of any real limit on ROI?

This essay speculates that at some point investors will not even tolerate a theoretical limit on profit-taking.  Investor and altruist motivations are most synonymous during start-up. Altruists want something safe and beneficial; investors want profit but understand that their product must first be safe and beneficial to generate profit.  The two groups can easily co-exist in one entity during start-up.  But at some point, investors will no longer tolerate altruists. They will object to even theoretical limitations on profit-taking.  That conclusion suggests that tax exemption for nonprofit-joint ventures is tolerable during start-up, but intolerable thereafter.