As of March 1, 2025, venture capital ("VC") funds with business dealings in California will be required to report annually on the diversity of the founding members of the businesses they back. These new reporting requirements were signed into law pursuant to Senate Bill 54 (the "Bill") on October 8, 2023, which is the first of its kind in the United States.

Application of the Bill

The Bill may impact Canadian businesses that do business in Canada. Specifically, the Bill applies to "Covered Entities," defined as VC companies that: (i) primarily invest and finance start-up, early-stage, or emerging growth companies; or (ii) manage assets on behalf of third-party investors, including investments made on behalf of a state or local retirement or pension system, and (i) are headquartered in California; (ii) have a significant presence or operational office in California; (iii) make venture capital investments in businesses that are located in, or have significant operations in, California; or (iv) solicit or receive investments from a person who is a resident of California.

Content to Report

Entities subject to the Bill must report to the Civil Rights Department (the "CRD") on the diversity demographics of the founders they invested in the prior year. Specifically, those covered by the Bill must report the gender identity, race, ethnicity, disability status and sexuality of each founding team member, in addition to whether any founding team member is a veteran or veteran with a disability, to the extent the founders they back disclose this information.

In addition, VC funds must also disclose the number and total value of venture capital investments to "diverse founding team members." The Bill defines diverse founding team members as those who self identify as a "woman, non-binary, 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."

Voluntary Participation for Founders

While the Bill compels VC funds to provide founding companies with a survey created by the CRD in order to solicit demographic information, participation is voluntary and up to the founding companies' discretion as each survey question will include a "decline to state" option.

Accessibility of Demographic Data

The Bill provides that the demographic information will be anonymized such that a particular survey response will not be associated with an individual founding company member. Once anonymized, the CRD will ensure the survey data is easily accessible for the public on its website.

Penalties for Failure to Comply

In the event a Covered Entity fails to file a report, the CRD will issue a notice requiring the Covered Entity to submit its report within 60 days. After the 60-day period expires, the CRD may commence proceedings and seek court orders (a) compelling the entity's compliance, (b) requiring the entity to pay a penalty, (c) ordering the entity to pay the CRD's costs and fees incurred in pursuing to the action, and (d) granting any other relief deemed appropriate by the court.

Looking Forward

While the Bill may undergo amendments, VC funds may benefit from reviewing the current status of the Bill here. Subject to future modifications and potential delays, Covered Entities should begin preparing for the collection of the prescribed information as of January 1, 2024.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.