Private fund managers and their underlying funds that invest in the venture capital space may be subject to additional reporting in California beginning this spring.
Per a new law enacted in the Golden State, venture capital-focused managers and private funds with a California nexus must annually survey the founding teams of their venture capital portfolio companies as to certain demographic data. These venture capital investors are, in turn, required to report the demographic data they receive from these surveys to the state.
Not only are private funds whose managers are based in California impacted by this law, but those private funds that invest in California-based venture portfolio companies or even solicit California-based investors are subject to the law’s reporting requirements.
Impacted groups are obligated to register with a California state regulator by March 1, 2026, and report the initial results of their surveys on April 1, 2026.
While this law obligates these VC managers to survey and report the resulting data, the portfolio companies themselves are not subject to this law and therefore will respond to these surveys solely on a voluntary basis.
Background
California’s Fair Investment Practices by Venture Capital Companies law requires certain venture capital funds to register with the state of California, submit a survey to their underlying portfolio companies regarding the diversity of their founding teams, and report this information to the state on an annual basis. Specifically:
- Commencing March 1, 2026, a covered venture capital company primarily engaged in the business of investing in or providing financing to startup, early-stage or emerging growth companies, and with a business nexus to California (each, a “Covered Entity”), must register with the state’s Department of Financial Protection & Innovation (DFPI).
- On an annual basis, and beginning for investments made in 2025, a Covered Entity must provide to each founding team member of each business in which the Covered Entity invested in during the prior calendar year a survey for voluntary completion to gather anonymized demographic information.
- By April 1, 2026 (and annually thereafter), a Covered Entity must aggregate the demographic information voluntarily returned by founding team members in the surveys and submit the anonymized data and other statutorily required information in a report to the DFPI.
- After April 1, 2026, reports will be made publicly available on the DFPI’s website.
What is a Covered Venture Capital Company?
This law applies to “venture capital companies” that meet the following requirements.
First, the entity
i. must invest at least 50% of its assets in venture capital investments, or
ii. meet the defining of a “venture capital fund” under the Investment Advisers Act of 1940; or
iii. meet the definition of a “venture capital operating company” under ERISA.
NOTE: For the purposes of this law, “venture capital investment” means an acquisition of securities in an operating company as to which the investment adviser, the entity advised by the investment adviser, or an affiliated person of either has or obtains management rights.
NOTE: Further, for the purposes of this law, “management rights” means the right, obtained contractually or through ownership of securities, either by one person alone or in conjunction with one or more persons acting together or through an affiliated person, to substantially participate in, substantially influence the conduct of, or provide (or offer to provide) significant guidance and counsel concerning, the management, operations or business objectives of the operating company in which the venture capital investment is made.
Regardless of the definitions in prong (i) , investment advisers who disclose a private fund as “venture capital fund” in Question 11 of Section 7.B.(i) of Form ADV Part 1 can assume that these private funds will satisfy the definition of a venture capital fund.
Second, the venture capital company must primarily engage in the business of investing in startup, early-stage, or emerging growth companies.
NOTE: The statute does not define “primarily” in this context, nor does it define the “business of investing in startup, early-stage, or emerging growth companies.” Industry observers have suggested that the DFPI could provide additional guidance on these definitions and other aspects of the law.
Third, the venture capital company must fall within California’s jurisdictional reach by meeting at least one of the following criteria:
i. being headquartered in California;
ii. having a significant presence or operational office in California;
iii. making “venture capital investments” in businesses located in, or with significant operations in, California; or
iv. soliciting or receiving investments from California residents.
Based on (iv) above, the law appears applicable to any venture capital fund which solicits California residents as potential investors.
Analysis
Under present guidance, venture capital fund managers would seem to have the discretion to report at the fund level (i.e., by filing a separate report for each fund), or at the manager level by providing a report prepared by a business that controls each covered entity (i.e., fund) at any time during the prior calendar year.
Reporting Obligations
By March 1, 2026, covered entities are required to register with DFPI by submitting certain identification information (such as the name of the firm and contact details of a designated point of contact) to the DFPI.
By April 1, 2026, covered entities must collect and submit the following information on an annual basis (with the initial 2026 reporting based on 2025 data):
- aggregated demographic information on the gender identity, race, ethnicity, sexual orientation, disability status, veteran status, and California residency (each, an “Identified Group”) for each founding team member of each of the covered entity’s portfolio companies;
- the investment amounts and percentages allocated to companies founded by individuals from each Identified Group, broken down by each respective category;
- the aggregate amount of capital that the covered entity invested in each portfolio company and the principal place of business in which it invested; and
- the number of founders who declined to provide demographic information.
This information should be reported anonymously in a manner that does not associate the survey response data with an individual founding team member of a venture capital portfolio company.
Firms should then provide the following report to the DFPI on an annual basis:
Survey and Voluntary Response
In order to collect this information, impacted firms should provide this survey to their underlying portfolio companies:
As noted in the survey, a founding team member’s decision to disclose demographic information is voluntary. No adverse action will be taken against a founding team member who declines to participate in the survey.
Cure Period and Penalties
If a covered entity fails to file a report by April 1 of a given year, the DFPI will notify the entity that it has 60 calendar days to submit the report without penalty.
If a covered entity does not submit the required report within the 60-day cure period, the DFPI may assess fines against the entity of up to $5,000 per day in addition to further measures.
Current Status
While the survey and report (linked above) are now available for submission to underlying portfolio companies, the DFPI’s registration portal is not yet open.
Takeaway
Salus GRC recommends that potentially impacted firms evaluate whether the law is applicable to their investment practices and operations. Firms should also evaluate whether they would prefer to file at the fund level or the manager level.
We also recommend that impacted firms register with the state as of March 1 and then begin to circulate the survey to applicable portfolio companies shortly thereafter.