As I discussed in this post from earlier this month, SB 54 would have required institutional investors, securities and real estate brokers, and others to report diversity status of startup founding teams. The bill has since been substantially rewritten and would now require some, but not all, investment advisers to a venture capital company, as defined, beginning March 1, 2025, to submit an annual report to the Department of Financial Protection and Innovation (DFPI) on their venture capital investments made in companies primarily founded by diverse founding team members.
The bill applies to investments advisers to a venture capital company that meets any of the following criteria:
- Has a certificate from the Commissioner of Financial Protection & Innovation ( "Commissioner") pursuant to Corporations Code Section 25231;
- Is exempt from registration under the Investment Advisers Act of 1940 pursuant to Section 203(l) of the Investment Advisers Act of 1940 and has filed a report with the Commissioner pursuant to 10 CCR 260.204.9(b)(2); or
- Has filed an annual notice with the Commissioner pursuant to Section 25230.1(b).
The first category captures California registered investment advisers. The second category captures advisers to venture capital funds that are exempt from both federal and California registration requirements. The last category applies to investment advisers registered with the Securities and Exchange Commission that has six or more clients that are resident in California and have filed the required notice with the Commissioner.
As a result, there is a lacuna for federally registered advisers with fewer than six clients that are residents in the state. Actually, the lacuna is much larger. Section 307 of the National Securities Markets Improvement Act of 1996 prohibits California from requiring the filing of anything more than what is filed with the SEC and a consent to service of process. Therefore, the legislature's attempt to impose reporting requirements on federally registered investment advisers is vulnerable to a preemption challenge.
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