On October 8, 2023, California passed into law a bill mandating venture capital firms to report on diversity data across their portfolio. The law, titled the Fair Investment Practices by Investment Advisers Act (SB 54), is the first of its kind in the United States and aims to promote transparency around the lack of diversity in startup funding. The scope of the law is broad, with meaningful implications for venture capital and private equity firms, as well as other investment vehicles.
Who Does This Apply To?
In short, this law applies to most venture capital firms with any investment in California-based companies or operational activity in California. Given the prevalence of California-based investors and startups, the scope and impact of this law is significant.
Specifically, the law applies to VC firms that meet both of the following:
1. Investment activity– the VC firm does either of the following:
- Invests in startup, early-stage or emerging growth companies
- Manages assets on behalf of third-party investors (e.g., state or local retirement or pension system)
2. Connection to California– the VC firm meets any of the following criteria:
- Headquartered in California
- Has significant presence or operational office in California
- Makes venture capital investments in business that are located in, or have significant operations in, California
- Solicits or receives investments from a person who is a resident of California
What Information Must Be Disclosed?
Covered firms will need to report aggregated diversity data on the race, ethnicity, gender identity, LGBTQ+ status, disability status, and veteran status of the founding teams for each of their portfolio companies. Data should be gathered via anonymous founder surveys conducted after investments are made.
In addition, VC firms must report the total number and dollar amounts invested in companies primarily founded by diverse teams, broken down by demographic categories. They must also disclose aggregate investment amounts and locations for all portfolio companies.
How Will Data Be Collected and Used?
Because the founder surveys collect sensitive demographic information, the law raises data privacy compliance considerations under laws like the California Consumer Privacy Act (CCPA). Firms should take care to gather data anonymously, disclose their practices, and confirm use cases are covered under legal exemptions.
In particular, founder surveys must not record individual data in association with founder names, and proper disclosures must be shared with founders along with the surveys. Aggregate data will be publicly shared online by the California Civil Rights Department and used for oversight purposes.
When Does This Go Into Effect?
The law goes into effect March 1, 2025, but VC firms will need to start collecting data on investments made from January 1, 2024 to be prepared for the first disclosures. Ongoing reports will be due annually.
What Are the Penalties for Non-Compliance?
If firms fail to comply, courts may compel reports and impose monetary penalties sufficient to deter future violations.
Several VCs, even ahead of this legislation, have been collecting portfolio company and firm diversity statistics. Historically, this has been driven by LP requests, investor commitments to DEI, and a desire to better support portfolio companies.
SB 54 represents a major step toward broadening this practice of accountability and transparency across the broader VC ecosystem.
That said, properly operationalizing this practice comes with its fair share of challenges, especially around data privacy and security, founder engagement, and data analysis. Given the near-term implications of this law, VC firm leaders should not wait to take the necessary steps to prepare for the next reporting cycle, including– this can include consulting legal counsel and considering partnering with specialized fund reporting solutions like Arbor to ensure compliance moving forward.
How Can Arbor Help?
Arbor is purpose-built for compliant, founder-friendly portfolio diversity reporting. Built by investors, for investors: the Arbor platform enables fund leaders to easily capture, analyze, and benchmark portfolio DEI metrics, while staying compliant with data privacy and security regulations. Beyond collecting the data, Arbor’s dashboard enables leaders to visualize trends over time, benchmark outcomes against industry averages, share insights with portfolio founders, and easily export into reports to maintain compliance with regulations like SB 54.
Contact us at firstname.lastname@example.org to learn more about how our platform can help your organization.