To highlight the lack of diversity, equity, and inclusion (DEI) in venture capital funding and encourage equal opportunities for funding for underrepresented groups, California Governor Gavin Newsom signed Senate Bill (SB) 54 into law on October 8, 2023. California is the first state to legislate efforts on diversity in the venture capital industry.
Beginning March 1, 2025, and annually thereafter, “covered entities” are required to report to the California Civil Rights Department (CRD) information about their funding determinations, including specified demographic information on the founding teams of the businesses they invested in during the year.
In the context of SB54, a “covered entity” is any venture capital company with a nexus with California that either primarily invests in or provides financing to startup, early-stage, or emerging growth companies or manages assets on behalf of third-party investors, which may include state or local retirement or pension systems.
Nexus is established if the company meets any of the following criteria:
• It is headquartered in California
• It has a significant presence or an operational office in California
• It makes venture capital investments in businesses located in, or with significant operations in, California
• It solicits or receives investments from individuals who are residents of California
The mandated disclosures seek to encourage members of the venture capital industry to invest in businesses owned by entrepreneurs with more diverse backgrounds.
SB54 requires covered entities to submit the following disclosures for the prior calendar year:
• At an aggregated level, certain demographic information of the founding teams of all the businesses in which the covered entity made a venture capital investment to the extent the information was provided according to the survey provided by the CRD.
• The total amount of venture capital investments to businesses primarily founded by diverse founding team members, as a percentage of venture capital investments made by the covered entity, in the aggregate and broken down into categories.
• The total amount of money in venture capital investments the covered entity invested in each business during the prior calendar year.
• The principal place of business of each company in which the covered entity made a venture capital investment during the prior calendar year.
Demographic information is collected via survey once an investment agreement has been executed and there has been an initial transfer of funds to the business. Founding team members will have an “option to decline” participation in the survey. Prior to, or concurrently with, the survey, a written disclosure should inform the founding members that participation is voluntary with no adverse action resulting from non-participation and that aggregate data will be reported to the CRD.
A covered entity should disclose the following demographic information for all businesses in which it made a venture capital investment in the prior year to the extent the information is provided according to the survey required under the bill:
• The gender identity of each member of the founding team, including nonbinary and gender-fluid identities
• The race of each member of the founding team
• The ethnicity of each member of the founding team
• The disability status of each member of the founding team
• Whether any member of the founding team identifies as LGBTQ+
• Whether any member of the founding team is a veteran or a disabled veteran
• Whether any member of the founding team is a resident of California
• Whether any founding team member declined to provide any of the information described above.
The covered entity must report the data from the survey at an aggregate level and in a manner that does not associate the results with an individual founding member. The survey results may be publicly released and shared on the CRD website.
Covered entities are required to submit the report annually, every March 1, to the CRD. If an entity fails to submit on the set date, the CRD will notify the entity of such failure and provide a 60-day grace period for compliance. Once the 60-day period has lapsed and the entity has not submitted, SB54 authorizes the CRD to initiate proceedings to compel compliance and even require penalty payment. Venture capital firms must preserve all records relating to the report for at least four years from the date the report was submitted to the CRD.
Preparing for New Disclosures
SB54 covers venture capital companies within California and holds those investing in or receiving funding from California companies accountable. Therefore, covered entities should incorporate diversity considerations into their governance, risk management, and strategy processes.
We recommend taking the following initial steps to prepare for the new disclosures:
• Assess and refine materiality determination: The new legislation means that covered entities will need to focus on diversity-related ESG topics, considering the needs of their internal and external stakeholders. Covered venture capital companies should also evaluate their existing DEI-specific or industry-specific disclosures and adapt them where necessary.
• Identify gaps: Covered entities need to review the new regulatory requirements and timelines to determine any gaps and necessary changes and evaluate whether they have the resources needed for compliance. This will require coordination with all relevant stakeholders and process owners.
• Evaluate processes, controls, and readiness: Entities can scrutinize their current internal control and data governance systems to assign roles and responsibilities for data ownership. Boards can develop oversight and top-down accountability mechanisms to support a controlled environment.
• Partner with experienced ESG professionals: Companies should partner with experienced ESG professionals. With the extensive data collection involved, having a dedicated professional can ease the burden of collating and organizing data and help streamline data-gathering and reporting processes.
How Scrubbed Can Help
Following the approval of the California climate-related disclosures and now the DEI disclosures for venture capital companies, the need to plan for ESG regulation compliance has risen to its peak. Establishing a multidisciplinary team of seasoned experts proficient in ESG accounting and regulatory nuances is necessary to help your company speed up aggregating, structuring, and formulating the required reporting protocols. Reach out to Scrubbed today to harness the specialized expertise of our ESG professionals. Let us streamline your organization’s compliance journey and propel it toward seamless adherence to regulatory mandates.
Disclaimer: The information contained herein is general and is not intended to address the circumstances of any particular individual or entity. It is not intended to be relied upon as accounting, tax, or other professional services. Please refer to your advisors for specific advice. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is correct as of the date it is received or will continue to be accurate. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
*Disclaimer: Services being offered do not require a state license.
**Special thanks to Theresa Kate Palompon for her valuable contribution to this article.
