Venture capitalists would have an extra year to prepare for a new California law requiring them to report on the diversity of the startups they fund under a proposal from Gov. Gavin Newsom’s (D) administration.
The legislative language released May 14 would also narrow the law to counter objections it would cover a wider range of financial professionals and not just venture capital firms.
Backers proposed the law (SB 54) to prod the venture capital sector to extend more funding to female entrepreneurs. Companies founded by women received 2.1% of the capital invested in venture-backed startups in the US during 2023, according to Pitchbook, which provides research and insights on global capital markets.
Even as Newsom signed the law in October, he flagged potential challenges, calling some provisions “problematic” and the timeline for implementation “unrealistic.”
The amendments proposed by his team seek to address some of those matters.
“This makes it a little more manageable and closer to what it was billed,” Catherine Skulan, a partner at Ropes & Gray who has been following the law, said.
Time Extension
The law will require venture capital firms investing in California or soliciting investments in the state to survey the founding teams of startups receiving funding.
Founding team members will be asked to disclose their race, gender, veteran status and disability status, though surveys will include the option not to respond. Venture capital firms will be responsible for collecting the data, aggregating it, and submitting it to the state.
The Newsom administration is proposing to narrow the law by scrapping a provision that covered companies managing assets “on behalf of third-party investors,” which observers said could end up applying to firms far beyond those providing early-stage investment to startups.
“You could be a huge buyout fund and you’d be covered,” Skulan said.
The law’s initial breadth and a March 1, 2025, deadline for filing the first round of reports set off a scramble for firms to understand how to comply.
The administration is proposing to move the deadline back to March 1, 2026, giving firms more time to prepare.
Enforcement Shift
The proposed changes would also shift responsibility for receiving the reports and enforcing the law to the California Department of Financial Protection and Innovation — which already regulates financial professionals — instead of the state Civil Rights Department.
Officials at the agency would get a suite of investigative powers to enforce the law, including the ability to take possession of a firm’s books. The department could also impose fines of up to $5,000 a day for violations of the law, with the power to seek fines of as much as $25,000 a day for reckless violations or $1 million a day for knowing violations.
While the proposed changes would make the department responsible for posting the aggregated reports on its website, they wouldn’t address concerns raised by industry groups that the survey process could expose sensitive personal information.
The fines and the department’s expansive investigative powers have prompted objections from critics of the law, who have argued that the voluntary surveys underpinning the measure will produce a skewed picture of diversity in the startup world.
“The fundamental flaws in this legislation are still there and now there are new ones,” Bobby Franklin, president and CEO of the National Venture Capital Association, said.
The state Department of Finance published the proposed changes on May 14 for potential inclusion in a trailer bill to accompany the state budget.
The proposal still requires approval from the legislature, which faces a deadline June 15 to approve a state budget.
