AB 501: Close the Bait-and-Switch Loophole

AB 501 will hold startup venture capital nonprofits accountable by ending the exploitation of a loophole that allows them to mislead the public under the guise of an altruistic mission with the intent of transferring its valuable property ­–including IP, products, and services– to a single for-profit entity. 

What is AB 501?

AB 501 will prevent any individual, business, or group from creating a startup venture capital nonprofit to exploit the charitable contributions of contributors and stakeholders, including knowledge, resources, and donations. By closing the loophole, startup venture capital nonprofits cannot transfer a substantial amount of their property (exceeding $100 million) to an acquiring for-profit entity as part of a single transaction. Additionally, AB 501 empowers the California Attorney General to take necessary actions to ensure these nonprofits’ compliance.

Background

California law allows individuals and organizations to exploit an unintentional loophole. This loophole enables startup venture capital nonprofits to attract top talent and contributors who support their stated altruistic mission, with the secret intention of converting to a for-profit entity once they have developed marketable products and services.

California’s Startup Venture Capital Nonprofit Loophole:

  • Provides an unfair advantage to eliminate competition.
  • Concentrates a substantial financial advantage in the hands of a few versus those who contributed and supported the nonprofit.
  • Weakens public trust in nonprofits when they are not held accountable to their original stated mission.
  • Opens the door for more individuals to create startup venture capital nonprofits, exploit the talent and contributions of those who support their altruistic mission, and transition to a for-profit corporation once they have valuable products and services.

Bait-and-Switch Loophole Example: OpenAI

  • OpenAI is a nonprofit organization founded to “build general-purpose artificial intelligence (AI) that safely benefits humanity, unconstrained by a need to generate a financial return.”
  • Inspired by the promise to benefit all humanity, AI researchers and experts worldwide left lucrative tech jobs to help develop and improve OpenAI’s artificial intelligence, including artificial general intelligence (AGI). Contributors donated millions of dollars in seed money necessary to create these models.
  • AGI is anticipated to surpass human intelligence and capabilities within one to three years – becoming humanity’s most valuable property. The first team to develop AGI will harness the unprecedented speed and power to improve at a rate far beyond what human developers could achieve, leaving everyone else far behind.
  • The value of AGI is nearly impossible to determine but is estimated to be worth trillions of dollars, as it is considered humanity’s most valuable asset. OpenAI lacks these substantial funds and would need to compensate the nonprofit for transferring AI and AGI assets. 
  • OpenAI is taking advantage of California’s bait-and-switch loophole and moving toward transferring its invaluable properties to a for-profit entity, effectively deceiving the public, donors, and researchers.
  • OpenAI must continue to be governed by a board to ensure that its altruistic mission –on which it was founded and which focuses on not taking humanity’s most valuable properties and contributions for profit– continues rather than transferring AGI into the hands of a few.

The Solution

California is at the forefront of protecting the public’s trust in nonprofits and their altruistic missions. By safeguarding innovation and the public trust and closing the bait-and-switch loophole, nonprofits are held accountable to their mission without the ability to profit from it or eliminate their competition at the expense of the public, supporters, and donors.

AB 501 will:

  • Protect Californians by addressing the supervision and oversight of startup venture capital nonprofit entities headquartered in California.
  • Close the bait-and-switch loophole allowing nonprofits to raise funds, enjoy tax-exempt status, and attract talent committed to an altruistic mission with the secret intention of moving to a for-profit once they have developed marketable products and services.
  • Prevent nonprofit entities from transferring a substantial amount (over $100 million) of their property or assets to an acquiring, for-profit entity as part of a single transaction.
  • Hold nonprofit entities accountable to the mission they were founded under.
  • Give California’s Attorney General the power to ensure that startup venture capital nonprofits comply with the law.
  • Ensure that the governance of nonprofits, such as OpenAI, remains transparent and accountable to its nonprofit charter, and preventing AGI’s immense power and profits from being concentrated into the hands of few.
SUPPORT AB 501!