California Governor Gavin Newsom signed Senate Bill 54, Fair Investment Practices by Investment Advisers, into law on October 8, 2023. Commonly known as the “New Diversity Reporting Law,” this legislation marks a pioneering effort to address the unequal funding distribution among women- and minority-owned emerging companies. With over 5,700 venture capital firms operating in California, the law’s implications are expected to reshape the landscape of the venture capital industry in the United States.
Broad Reach of the New Diversity Reporting Law
The New Diversity Reporting Law extends its reach beyond traditional venture capital companies, encompassing private equity funds, co-investment vehicles, family offices, trusts, and more under specific circumstances. The law introduces a comprehensive definition of “covered entities” subject to the new reporting requirements.
What is a “venture capital company”?
A venture capital company qualifies if it meets one of three criteria: at least 50% of its assets are venture capital investments, it qualifies as a “venture capital fund” under the Investment Advisors Act, or it qualifies as a “venture capital operating company” under the Employee Retirement Income Security Act.
When does a “venture capital company” qualify as a “covered entity”?
For a venture capital company to be considered a “covered entity,” it must have sufficient nexus to California and meet the following criteria: manage assets on behalf of third-party investors or primarily invest in startup, early-stage, or emerging growth companies.
Reporting Requirements
The New Diversity Reporting Law mandates “covered entities” to annually report demographic information of the “founding team members” at the companies they invested in during the prior year. The reporting process involves a standardized survey established by the California Civil Rights Department (CRD).
What demographic information is required?
The collected demographic information includes gender identity, race, ethnicity, disability status, sexual orientation, veteran status, and California residency. While “founding team members” can opt out of the survey, refusals must be reported to the CRD on an aggregate and anonymized basis.
Who qualifies as a “founding team member”?
A “founding team member” is an individual who owned an initial interest in the business, contributed developmentally or conceptually before initial shares were issued, and was not a passive investor. Alternatively, it includes individuals in managerial roles within the business.
Additional reporting requirements
“Covered entities” must report the percentage of “venture capital investments” made in businesses with primarily “diverse founding team members” and the total amount of money deployed in “venture capital investments” during the reporting period.
Who is a “diverse founding team member”?
Any “founding team member” self-identifying as a woman, nonbinary, Black, African American, Hispanic, Latino/Latina, Asian, Pacific Islander, Native American, Native Hawaiian, Alaskan Native, disabled, veteran or disabled veteran, lesbian, gay, bisexual, transgender, or queer.
Public disclosure
The CRD must publish the reported data in an aggregate and anonymized manner, making it readily accessible to the public.
Implementation Timeline and Potential Delays
While reporting obligations are set to commence on March 1, 2025, Governor Newsom expressed concerns about the law’s provisions and unrealistic timelines. Anticipating barriers to successful implementation and enforcement, the Governor announced plans to propose cleanup language as part of his 2024-25 budget, typically released around January 10 and finalized in the summer.
Don’t be a silent ninja! Let us know your thoughts in the comment section below.