SB 54: Investment community's new DEI reporting requirements

On Oct. 8, Gov. Gavin Newsom signed into law California Senate Bill 54 (SB54), which aims to address the disparities in funding opportunities for underrepresented groups, particularly women and racial minorities. By requiring “Venture Capital Companies” (VCCs or, more commonly, VCs) to report demographic data, SB54 seeks to illuminate and, subsequently, address the implicit biases that have historically shaped funding decisions. Significantly, the bill applies a broad definition of subject companies, including some entities based in other states with investment activity in California.

Beginning March 1, 2025, VC firms must start reporting the diversity data of portfolio investments made during the prior year. Failure to comply with SB54’s reporting requirements can lead to enforcement action by California’s Civil Rights Department (CRD).

Mandatory reporting requirements

Under SB54, covered entities are required to collect and report detailed demographic information (racial, ethnic, gender, sexual orientation, disability, and veteran status) of portfolio companies’ founding team members, the number and amount of investments in businesses founded by diverse teams, and where these businesses are located. Data must be gathered through a standardized survey created by the CRD, but response by a covered entity’s portfolio company is voluntary. Statistics reports are to be aggregated and anonymized to protect individual privacy and then submitted to the CRD for the information to be made public on its website.

While survey responses are optional, SB54 poses some privacy concerns. Many privacy laws, including the California Consumer Privacy Act and analogous statutes in various states, regulate the handling of personal information, such as race and ethnicity. Exemptions for adherence to other legal requirements do exist, but covered entities should still enhance their privacy notices and consider seeking consent as a part of the survey process in order to align with privacy laws.

Scope of SB 54

VCC definition under SB54 is broad and potentially encompasses an extensive range of entities beyond conventional “venture capital funds,” such as private equity, family offices, trusts, and even some accelerators. The interpretation extends SB54’s reach, possibly impacting non-traditional venture capital funds more than initially anticipated by its drafters.

Additionally, a covered entity under SB54 must report data on all of its portfolio companies, not just those established or primarily operating within California. Covered entities are mandated to report the total venture capital investment amount made in “each business” for the previous year, however, it is uncertain what details or identifiers the CRD will require. Even if CRD allows generic naming and combining certain details, such as portfolio company location, industry, and the name of the VC, publicly available information may still lead external parties to be able to identify specific businesses, which may be a concern.

Challenges and criticisms

SB54’s broad language, administrative and expense burdens, and privacy concerns are also among the arguments raised by the bill’s critics, including Gov. Newsom. In his signing statement, the governor noted that the CRD will have a steep learning curve in implementing SB54. He is expected to make further refinements to implementation through the budgeting process, so this one will be one to watch as it evolves to final form.