California Senate Bill 54 (the Diversity Reporting Law) requires certain funds with a nexus to California to report on the diversity of the leadership of the companies in which they invest. Amendments to the Diversity Reporting Law have pushed back the compliance deadline to March 2026 but have not otherwise provided sufficient clarity on which entities will be subject to reporting requirements.
What you need to know
- The Diversity Reporting Law is intended to highlight the lack of funding for companies owned by diverse owners by mandating annual reporting requirements in respect of the same with the potential for substantial fines for failure to file.
- Entities required to file include venture capital investors, funds or operating companies who invest primarily in startup, early-stage or emerging growth companies with headquarters, a significant presence or investors (or targeted investors) in California.
- One of the remaining ambiguities under the amendments is how "emerging growth companies" will be defined; if the Diversity Reporting Law follows the federal Jumpstart Our Business Startups (JOBS) Act definition, the Diversity Reporting Law may apply beyond those investment funds that market themselves as venture capital focused (including to many buyout funds).
Background
In 2023, California enacted the Diversity Reporting Law, which required venture capital firms with a nexus to California to report data regarding the diversity of the founding members of the companies in which they invest, with a March 2025 compliance deadline. The Diversity Reporting Law was drafted broadly in a manner that impacted a wide variety of funds, including those not physically located in California and funds that would not generally be viewed as "venture capital" funds. In June 2024, the Governor of California approved updates to the Diversity Reporting Law that pushed back the compliance deadline to March 2026 but did not otherwise adequately clarify the ambiguities around who is subject thereto.
The Diversity Reporting Law is intended to highlight the lack of funding for companies owned by diverse owners. Entities required to report must file an annual report on a fund-by-fund basis detailing demographic information about certain founding team members of the companies in which the entities invested in the prior year, as well as total capital invested in such businesses and a break-down between diverse and non-diverse founding teams. Failure to file the required reporting could result in substantial fines.
Amendment updates and remaining ambiguities
Covered entities under the amended Diversity Reporting Law must fall under the following definitions:
- are venture capital investors1, venture capital funds2, or venture capital operating companies3;
- who primarily engage in the business of investing in or providing financing to startup, early stage, or emerging growth companies; and
- who have headquarters in California, have a significant presence or operational office in California, make venture capital investments in businesses located in or with significant operations in California, or solicit or receive investments from one or more residents of California.
While the amendments to the Diversity Reporting Law appeared to have been intended to limit the applicability of the law to avoid capturing investment vehicles that do not engage in venture capital investment (as such term is understood in the market), there is no definition provided by the Diversity Reporting Law (or any other California law) for "emerging growth companies". The only available definition is provided federally under the JOBS Act, which currently defines emerging growth companies as those that have annual gross revenues of less than US$1.235 billion. With the application of the JOBS Act definition, the Diversity Reporting Law could apply to any investment fund that invests in companies in respect of which it obtains management rights, to the extent such companies have gross revenues below the stated threshold and such investment funds have solicited or received investments from California residents.
The Diversity Reporting Law may still face legal challenges that could delay, prevent, or limit implementation of the law. To date, however, no such challenges have been brought. We will continue monitoring the effects of the Diversity Reporting Law and will keep you apprised of any future developments.
Footnotes
1. Venture capital investors mean any entity where on at least one occasion during each annual period, commencing with its initial capitalization and once per annum thereafter, at least 50% of its assets (other than short-term investments pending long-term commitment or distribution to investors), valued at cost, are venture capital investments, as defined in subsection (a)(5) of Section 260.204.9 of Title 10 of the California Code of Regulations (i.e., an investment in an operating company in respect of which the investment adviser, the entity advised by the investment adviser, or an affiliated person of either has or obtains management rights).
2. Venture capital funds as defined under the Investment Advisers Act of 1940 include any private fund that holds itself out as pursuing a venture capital strategy and holds no more than 20% of its aggregate commitments in non-qualifying investments.
3. Venture capital operating companies as defined under the Employee Retirement Income Security Act of 1974 include funds in which at least half of the portfolio company investments are comprised of interests in operating
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