Legal Challenges Brewing with SB 54 Signed into Law this Week

A bill that would force venture capitalist (VC) companies in California to disclose the gender and race of the founding members of companies that was signed into law earlier this week may see legal trouble on the horizon as many groups are considering lawsuits blocking the bill.

Senate Bill 54, authored by Senator Nancy Skinner (D-Berkeley), will specifically require venture capital companies to report annually on the race and gender of all founding members of companies they invest in starting in 2025. The bill would require this information to be collected and reported in a manner that does not associate the survey response data with an individual founding team member. If companies do not comply in time, they can be subsequently penalized, with the Civil Rights Department being able to bring civil action against firms. SB 54 would also ensure that the Civil Rights Department of the Business, Consumer Services and Housing Agency will make the reports received available to the public.

Senator Skinner wrote the bill earlier this year in an attempt to bring diversity to the VC sector and in the companies they invest in. She specifically noted that SB 54 is designed to create transparency of venture capital investments in California and help more women- and minority-owned startups access vital VC funding. While proponents said that they hoped the bill would create more funding to go to diverse companies, opponents said that the bill was heavily skewed, was unfair towards VC companies, and would only encourage more VC firms to leave California because of the new regulations.

With little argument, Governor Gavin Newsom then signed the bill into law this week without comment. The Globe reported on the bill signing on Monday, specifically pointing out that previous laws for diversity mandates on boards were ruled unconstitutional.

“In addition to the patent stupidity and needless meddling of Skinner’s SB 54, some believe the bill violates the First Amendment by prying into the gender, racial, ethnicity and sexual preference status of the founders of investment companies, creating an undue burden and invasion or privacy,” reported the Globe.

SB 54 post-signing

However, opponents noted that this is likely not the end of SB 54. Lawsuits are currently being advanced because of SB 54 violating the first amendment.

“Since it was passed Monday, yeah, lawsuits are currently being discussed around this,” explained Neil, a constitutional lawyer who has helped on cases against the state before. “I mean, it obviously goes against it, and the wording of the bill is very open to interpretation.

“We’re going to see a lawsuit soon. California has struck down diversity bills similar to this before for similar reasons, so VC firms and other groups not wanting this to pass are encouraged. If someone with a law degree helped craft this bill, they need to seriously consider giving it back. Expect a suit soon.”

Others noted that the lawsuit is only strengthened by the bill being largely unnecessary, as diversity has been improving organically in the tech industry for years, and that people should be looking at the worker numbers and not the demographics of owners as a sign of progress.

“This bill will just not work,” added Tim McPherson, a tech HR expert, to the Globe. “Yes, founding members is one thing, but employees are another. So, what if a Latino-owned tech firm has hired mostly white and Asian programmers? What does that say? Or what if a female-owned company hires mostly male workers? That one has actually been increasingly common, as more women have become owners, but the tech industry workforce is about 75% male. What if there is a white-male owned company that makes an effort to hire  more women and minorities? They are thrown under the bus by this bill.

“Diversity is happening by itself, as California is now a minority majority and more and more women get higher positions. We’ve been seeing that happen naturally. She said she wants the bill to get more minority and women owned companies VC funding. But again, it is happening naturally. You don’t need a list that doesn’t tell the entire story.

“And on top of that, VC firms pick the companies they think can best succeed. They are not looking at race or gender if they think a company can make them money. That’s kind of the equalizer here. They aren’t going to say no to a good idea. This bill is going to try and shame them into making non-fiscally directed decisions. It’s just an all around awful idea to do that. If the VC makes less money, then they have less money for other companies to invest in.

“If people like Skinner really want more diversity, they should either leave the system alone and let it happen naturally, or if they really want to meddle, then offer a small tax break to VC funded companies that meet a certain level of diversity. Nothing too large to be unfair to other companies, but big enough where VC firms would have it as a consideration. Don’t outright push or nudge these companies though. That only leads to disaster and companies leaving the state.”

Lawsuits against SB 54 are expected soon.