California Bill Designed to Support Underrepresented Entrepreneurs Signed into Law

SB 54 applies to all “covered entities.” A “covered entity” is any venture capital company that meets both of the following criteria:

• The company either:

-  Primarily engages in investing in or providing financing to startup, early-stage or emerging growth companies; or
-  Manages assets on behalf of third-party investors, which may include state or local retirement or pension systems.

• The company meets one or more of the following criteria:

-  It is headquartered in California;
-  It has a significant presence or an operational office in California;
-  It makes venture capital investments in businesses located in, or with significant operations in, California; or
-  It solicits or receives investments from individuals who are residents of California.

Once effective, SB 54 will require a “covered entity” to annually report the following information, to the extent available, on all businesses in which it made a venture capital investment:

• The gender identity of each member of the founding team, including nonbinary and gender-fluid identities;
• The race of each member of the founding team;
• The ethnicity of each member of the founding team;
• The disability status of each member of the founding team;
• Whether any member of the founding team identifies as LGBTQ+;
• Whether any member of the founding team is a veteran or a disabled veteran;
• Whether any member of the founding team is a resident of California; and
• Whether any member of the founding team declined to provide any of the information described above.

A “covered entity” must gather the demographic information (as shown above) from founding team members of businesses funded by a venture capital company through a standardized survey that includes a “decline to state” option for each question. The process includes notifying founding team members that: 1) participation is voluntary, 2) no adverse action will result from non-participation, and 3) aggregate data will be reported to the CRD. The aggregate information collected may be publicly released by the CRD. Additionally, such demographic information can only be collected after the “covered entity” has executed an investment agreement and has transferred funds to the business.

A “covered entity” must keep its records preserved for at least four years after delivering the report to the CRD. If a “covered entity” fails to file a report by March 1 of a given year, the CRD will notify it of such failure and the “covered entity” will be required to submit the report within 60 days of the notification. If a “covered entity” still fails to submit its report after the 60-day period has elapsed, the CRD may commence an enforcement action against the non-compliant entity.

Technology policy advocates, including Senator Nancy Skinner, who sponsored SB 54, are enthusiastic about its passage. They believe it will shed light on funding disparities and encourage venture capital funds to invest in a more diverse base of entrepreneurs. The law is seen as a tool to empower underrepresented entrepreneurs to make informed decisions and save time by targeting fund managers who have a demonstrated pattern of supporting diversity.