California’s SB 54 Will Require Many VC and PE Funds to Report Founder Range Statistics to the California Civil Rights Division

California’s SB 54 Will Require Many VC and PE Funds to Report Founder Range Statistics to the California Civil Rights Division


November 7, 2023

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On October 8, 2023, California signed into regulation Senate Invoice 54 (“SB 54”)(1), which seeks to extend transparency into the variety of founding groups within the enterprise capital trade. We count on that a lot of our non-public fund adviser shoppers could also be picked up beneath SB 54’s broad definition of “Coated Entities,” and can thus be required to report variety statistics to the California Civil Rights Division (“CRD”) if their portfolio corporations or buyers have a connection to California. We count on this laws could have extensive influence together with to enterprise capital funds and probably non-public fairness funds with an lively funding technique (a) headquartered in California, (b) investing in portfolio corporations based mostly in California, or (c) soliciting or having restricted companions based mostly in California.  SB 54 is at present scheduled to enter impact on March 1, 2025.

The beneath resolution tree units forth learn how to decide if SB 54’s reporting necessities apply to an entity.

Coated Entities Topic to the Reporting Necessities

Chart Footnotes

  1. The California Code’s definition of a “Enterprise Capital Firm” is complicated, and whether or not an entity might be thought of a VCC deserves a case-by-case evaluation. In easy phrases, an entity usually might be a VCC in California whether it is (i) a “Enterprise Capital Fund” as outlined by the SEC, which means it’s a non-public fund that (1) holds itself out to buyers as pursuing a enterprise capital technique, (2) holds not more than 20% of the fund’s commitments in non-qualifying investments, together with non-convertible debt, secondaries, public issuances, different non-public or registered funds, sure digital property, or leveraged buyouts, (3) doesn’t borrow or in any other case incur leverage in extra of 15% of the fund’s commitments, after which solely on a short-term foundation, and (4) limits investor redemption rights to “extraordinary circumstances”; (ii) a “Enterprise Capital Working Firm” as outlined by the Division of Labor, which means 50% of fund property (valued at price) have to be invested in working corporations or spinoff investments through which the fund has direct contractual administration rights and the fund should train such administration rights with respect to at the least one portfolio firm; or (iii) if 50% or extra of the entity’s property are “Enterprise Capital Investments” or associated derivatives per Part 260.204.9 of the California Code at any time in a given reportable 12 months. “Enterprise Capital Funding” means an acquisition of securities in an working firm as to which the funding adviser, the entity suggested by the funding adviser, or an affiliated individual of both has or obtains administration rights, or the fitting to considerably take part in, to considerably affect the conduct of, or to offer (or to supply to offer) important steerage and counsel regarding, the administration, operations or enterprise targets of the working firm through which the enterprise capital funding is made.
  2. No steerage or cross-reference was given concerning the definitions of “Early Stage” or “Rising Progress Corporations” beneath SB 54.
  3. No steerage or cross-reference was given concerning what constitutes a “important presence” in California beneath SB 54 and sponsors might want to make a subjective willpower concerning the identical.
  4. See footnote (A) for the definition of Enterprise Capital Funding. No steerage or cross-reference was given concerning what constitutes “important operations in California” beneath SB 54 and sponsors might want to make a subjective willpower concerning the identical.

Reporting Necessities

Below SB 54, lined entities are required to offer portfolio corporations the chance to offer demographic information yearly on a kind that might be prescribed, after which make annual stories to the CRD with respect to portfolio corporations through which they’ve invested over the prior calendar 12 months on the (i) founding staff demographics of their portfolio corporations and (ii) investments every lined entity makes in portfolio corporations with numerous founding groups.

Demographic information of portfolio firm founding groups that have to be reported beneath SB 54 on an aggregated and anonymized foundation, to the extent it was offered by the lined entity(2), contains:

  1. Race;
  2. Ethnic identification;
  3. People who identification as LGBTQ+;
  4. Gender identification, together with nonbinary and gender-fluid identities;
  5. Incapacity standing;
  6. Veteran standing; and
  7. California resident standing.

Investments made within the prior calendar 12 months in portfolio corporations with numerous founding groups should even be reported as a share of the lined entity’s mixture enterprise capital investments. SB 54 requires each mixture reporting and categorical stories for every enumerated group above. Moreover, the lined entity should report the greenback quantity of its portfolio firm investments for the prior calendar 12 months and the principal place of job of every portfolio firm. SB 54 permits the CRD to publish this anonymized data on-line and acquire charges for the administration of SB 54, and gives for authorized recourse for failure to conform inside sixty (60) days after March 1, 2025.

SB 54 notes that the CRD “might use any data collected…in a civil motion introduced by the CRD beneath this chapter or different regulation.” The introduction to the laws additionally notes that present regulation makes discrimination unlawful, gives a explanation for motion towards any one who “denies, aids or incites a denial, or makes any discrimination or distinction on the bases listed, as specified, and permits the restoration of legal professional’s charges,” and establishes the CRD to analyze and prosecute complaints alleging discrimination. Accordingly, SB 54 conceivably lays the groundwork for the CRD to probably sue sponsors on the premise of discrimination.

Penalties of Non-Compliance

If a lined entity doesn’t adjust to the reporting necessities, a courtroom of competent jurisdiction can order injunctive reduction and levy fines towards the lined entity. The quantity of the high quality will rely on the “quantity needed to make sure compliance” and the courtroom will take into consideration the lined entity’s dimension, property beneath administration, and motive for noncompliance.

Uncertainties and Timeline

The enforceability, scope, and furtherance of the legislative intent of SB 54 stay to be seen with out additional clarification from Governor Newsom’s administration and the California Legal professional Common’s Workplace. Areas of uncertainty may embody the next:

  • Ambiguity of the scope of the regulation’s protection concerning out-of-state entities, lined entities and its enforceability usually.
  • Litigation in mild of the scope and whether or not the regulation meets its intent to additional variety, fairness, and inclusion given the onerous reporting necessities.
  • The impact of the regulation shouldn’t be utilized evenly when contemplating smaller funds who may themselves be numerous as in comparison with activist arms of enormous institutional buyers with extra sources.
  • Dissuasion of soliciting and accepting California buyers if a non-public fund doesn’t in any other case have a connection to California.
    • Given there are not any threshold necessities to the investor prong of the lined entity definition, such at the least funding quantity, this provision may expose shoppers who’re non-California entities that meet the California definition of a “Enterprise Capital Firm” to SB 54’s reporting necessities in the event that they settle for subscriptions from California residents, even when they don’t seem to be advertising in California.
  • Whether or not the CRD will train its authority to take motion towards towards founders who they decide discriminate of their choice of portfolio corporations and managers.

The proposed efficient date of March 1, 2025 would require all lined entities to gather the requested data for fiscal 12 months 2024. This efficient date seemingly might be in flux as a result of uncertainties above. However, it’s advisable that personal fund sponsors start working to make sure they’ve the infrastructure to fulfill the reporting necessities as a result of breadth of the regulation because it at present stands.


(1) Senate Invoice 54, Ch. 594, 8 October 2023 obtainable right here.

(2) Portfolio corporations might select to offer variety statistics, but additionally might decline to offer them, of their discretion. Sponsors should not permitted to discourage portfolio corporations from offering the data.

The next Gibson Dunn attorneys assisted in getting ready this shopper replace: Lexi Hart, Shannon Errico, and Kevin Bettsteller.

Gibson Dunn’s legal professionals can be found to help with any questions you will have concerning the problems and concerns mentioned above. Please contact the Gibson Dunn lawyer with whom you normally work, the authors, or any of the next leaders and members of the agency’s Funding Funds observe group:

Funding Funds Group:
Jennifer Bellah Maguire – Los Angeles (+1 213-229-7986, (e-mail protected))
Kevin Bettsteller – Los Angeles (+1 310-552-8566, (e-mail protected))
Albert S. Cho – Hong Kong (+852 2214 3811, (e-mail protected))
Candice S. Choh – Los Angeles (+1 310-552-8658, (e-mail protected))
John Fadely – Singapore/Hong Kong (+65 6507 3688/+852 2214 3810, (e-mail protected))
A.J. Frey – Washington, D.C./New York (+1 202-887-3793, (e-mail protected))
Shukie Grossman – New York (+1 212-351-2369, (e-mail protected))
James M. Hays – Houston (+1 346-718-6642, (e-mail protected))
Kira Idoko – New York (+1 212-351-3951, (e-mail protected))
Gregory Merz – Washington, D.C. (+1 202-887-3637, (e-mail protected))
Eve Mrozek – New York (+1 212-351-4053, (e-mail protected))
Roger D. Singer – New York (+1 212-351-3888, (e-mail protected))
Edward D. Sopher – New York (+1 212-351-3918, (e-mail protected))
William Thomas, Jr. – Washington, D.C. (+1 202-887-3735, (e-mail protected))
Shannon Errico – New York (+1 212-351-2448, (e-mail protected))
Lexi Hart – Washington, D.C. (+1 202-777-9552, (e-mail protected))

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