This alert is a follow-up to our October 9, 2023 alert regarding Fair Investment Practices by Investment Advisers ("SB 54"), the recent California law intended to provide transparency with respect to founder diversity in certain investments made by "venture capital companies" (which the law defines broadly enough to seemingly capture a wide range of private investment funds, including traditional venture capital funds and private equity funds, as well as other investment vehicles) meeting certain criteria under the law.
Signed into law on October 8, 2023, SB 54 requires these "covered entities" to collect and disclose, on an annual aggregated basis starting in March 2025, certain demographic information regarding the founding teams of the businesses in which they made "venture capital investments" in the prior calendar year, as well as other portfolio information related to such investments. SB 54 defines "venture capital investments" broadly to generally mean an acquisition of securities that convey management rights in an operating company. Therefore, covered entities must attempt to collect the required information with respect to in-scope companies in which they make investments from January 1, 2024. When signing the bill into law last October, Governor Newsom messaged that it "contains problematic provisions and unrealistic timelines" that he would propose to address as part of the 2024-2025 Governor's Budget process. Two months into the first reportable year under the law, however, neither the Governor nor the agency charged with overseeing the law, the California Civil Rights Department ("CRD"), has provided any further guidance to address the promise made at signing, or even to allow covered entities to follow the requirements of the law, as written.
Specifically, Governor Newsom did not address SB 54 when the 2024-2025 Governor's Budget was released on January 10, 2024. Instead, the Governor's Budget deferred consideration of all new, discretionary spending decisions from recently chaptered legislation, including SB 54, until the Department of Finance submits revised revenue and expenditure estimates to the Legislature in mid-May. Further, the sponsor of SB 54, Senate Budget Chair Nancy Skinner, has not publicly pushed for SB 54 funding as part of this year's budget process (in contrast to sponsors of other recent California legislation, including with respect to climate disclosure). Given the lack of urgency from the Governor and the law's sponsor, it is possible that we will not see any developments with respect to SB 54 until the end of the first half of 2024 or later.
In addition, SB 54 requires covered entities to use a standardized survey form provided by the CRD to collect information that must be reported under the law. As of the date of this alert, the CRD has not published this form or offered any public guidance for covered entities that are waiting for its issuance.
When signed into law, some commentators raised the possibility of legal challenge to SB 54. As of the date of this alert, we are not aware of any suits or challenges having been filed or any industry trade group challenging SB 54 more broadly. With no challenges to SB 54 and no trailer bills (separate bills to implement the main budget act by enacting corresponding changes to existing state law) to refine it, but without the necessary governmental form of survey or other actions to allow compliance with the law as drafted, covered entities find themselves in a state of limbo.
In the face of this, managers affected by SB 54 might consider the following to place themselves in the best position to respond to the law:
- Identify which of the manager's funds are "covered entities" under the law;
- Analyze investments made since January 1, 2024 by covered entities (and investments in the pipeline) to determine which may be "venture capital investments" that are in scope under the law;
- Consider updates to existing privacy notices around the collection and use of the information collected in the required survey, and assess the privacy impact of such collection and use; and
- Assess the capability of internal compliance functions to gather and report the required information once the CRD's survey becomes available (we do not advise that managers proactively create their own surveys to address the law).
We await developments in connection with the budget to provide more clarity on SB 54 and will provide an update when more information becomes available.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
