By Adam Clark

OpenAI has abandoned a plan to put its artificial-intelligence business under the control of a for-profit entity. The ChatGPT maker looks to have been forced to water down its plans by authorities, but it will create a headache for its relationship with major backer Microsoft.

OpenAI is currently structured as a nonprofit company with a board that oversees its for-profit business. The company had intended to become a more conventional profit-seeking company, although retaining some public-benefit and nonprofit objectives.

However, OpenAI said late Monday it scrapped the for-profit conversion plan after discussions with civic leaders and the attorneys general of California and Delaware, who would be required to sign off on it.

While the company didn't provide detail on what had caused the change of mind, a likely sticking point was how to divide the company's assets between its nonprofit and its corporate backers such as Microsoft. Because most of OpenAI's operations are in California, that state's attorney general would have jurisdiction to ensure its charitable assets were protected.

The plan had run into criticism and a legal challenge from Elon Musk, a co-founder of OpenAI who has since become a fierce critic of the company under the leadership of its CEO Sam Altman and sought to block the for-profit conversion via a challenge in the courts. Musk is the owner of AI start-up xAI, a rival to OpenAI.

What happens next?

OpenAI will continue under the control of a nonprofit. Meanwhile, the company's for-profit subsidiary will turn into a public-benefit corporation, requiring the company to balance shareholder interests and the public benefit in its decision-making.

"We look forward to advancing the details of this plan in continued conversation with them, Microsoft, and our newly appointed nonprofit commissioners," Altman said in a letter to OpenAI's employees.

Altman said the changes would still allow a planned $30 billion investment from Japan's SoftBank, which had been dependent upon the successful restructuring, to go ahead. The investment values OpenAI at $300 billion, up from $157 billion in a funding round late last year.

What does it mean for Microsoft?

The change in plans is something of a blow for Microsoft, which has pumped $13 billion into OpenAI since 2019. The for-profit conversion would have simplified the two companies' relationship and made it easier to value Microsoft's participation.

Microsoft and other OpenAI investors don't own equity in the company, instead receiving a share of any future profits of the company, subject to a cap. However, that could be about to change.

"Instead of our current complex capped-profit structure -- which made sense when it looked like there might be one dominant AGI [Artificial General Intelligence] effort but doesn't in a world of many great AGI companies -- we are moving to a normal capital structure where everyone has stock," Altman wrote in his letter to employees.

Depending on how the new capital structure works, that could provide a silver lining for Microsoft. Additionally, the SoftBank investment should mean OpenAI will be able to continue to spend heavily on Microsoft's cloud-computing resources, which was a key driver for the software giant's recent strong earnings.

Microsoft didn't immediately respond to a request for comment early on Tuesday. Microsoft shares were down 0.5% in premarket trading.

Barron's owner News Corp has a content-licensing partnership with OpenAI.

Write to Adam Clark at adam.clark@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

May 06, 2025 08:21 ET (12:21 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.