04-22-25 California DEI Reporting
California has enacted legislation mandating that venture capital companies with a nexus to the state report demographic information about the founding teams of their portfolio companies. The initial law was signed in 2023, with subsequent amendments in 2024 to address implementation concerns. The first reports are required to be filed in 2026.
1. Definition of Covered Entities:
This law will apply to both venture capital funds and their fund managers. The definition is broad, however, and may capture of types of investment vehicles and their managers, including certain private equity funds and real estate funds. To qualify as a venture capital company under this legislation, an entity must meet specific criteria. One way to qualify is by holding at least 50% of its assets in venture capital investments. Alternatively, an entity may qualify if it is defined as a venture capital fund under Rule 203(1)-1 of the Investment Advisers Act of 1940, or if it is designated as a venture capital operating company as per ERISA guidelines. In addition to meeting one of these criteria, the company must be primarily engaged in investing in or financing startup, early-stage, or emerging growth companies, or manage assets on behalf of third-party investors. Finally, a nexus to California is established if the company is headquartered in California or offers funds to investors within the state.
2. Reporting Obligations:
Covered entities are obligated to collect specific demographic information from the founders, CEOs, and presidents of their portfolio companies. Covered entities will be required to present the founding team members of all businesses in which they invest (no matter where located) with a standardized demographic survey in a form that will be provided by the California DFPI. This information includes race, ethnicity, gender, sexual orientation, and disability status. The first report containing this data, covering the 2025 calendar year, is due by April 1, 2026. Subsequent reports are due annually on April 1 thereafter. The California Department of Financial Protection and Innovation (DFPI) will then publish the collected data on its website.
3. Penalties for Non-Compliance:
Failure to comply with these reporting requirements may result in penalties. A maximum cap has been established for these penalties, except in cases where violations are deemed reckless or knowing.
Starting in 2026, covered entities must update information and submit reports to DFPI by April 1 annually. Non-compliance leads to a 60-day cure period, after which penalties may be enforced. Courts determine penalties based on factors like financial standing, capped at $5,000 per day unless violations are reckless or knowing. DFPI can also seek attorney fees and publish violation details.
4. Record Retention:
Covered entities are required to maintain records related to the reports for a minimum period of five years.
5. Implications for Venture Capital Companies:
Venture capital firms with operations or investor relations in California should carefully assess their status as covered entities under this law. If the law applies, these firms must establish procedures to collect the required demographic data from their portfolio companies and ensure timely annual reporting to the DFPI. Furthermore, they should implement record-keeping practices that comply with the five-year retention requirement.
6. Conclusion:
California’s DEI reporting requirements represent a significant step towards transparency in venture capital funding. Venture capital companies should promptly evaluate their obligations under this legislation and take the necessary steps to ensure compliance by the stipulated deadlines.
Who can I call with questions?
For more information, contact Gregory Gribben, Esq. at (585) 987-2875 or ggribben@woodsoviatt.com, Michael Perlo, Esq. at (585) 269-3815 or mperlo@woodsoviatt.com, other member of our Investment Management and Financial Services practice groups or your Woods Oviatt Gilman LLP attorney.
