California suspends enforcement of law requiring VCs to report diversity data

Under a new state regulation, venture capital firms operating in California were supposed to file demographic data about their portfolio companies, including the gender and race of founders who backed them. But amid public criticism from some tech leaders, the California agency that administers the new requirement suspended it just before the Wednesday deadline for firms to make their first disclosures.

“The California Department of Financial Protection and Innovation (DFPI) announced that it plans to initiate rulemaking in response to comments from various stakeholders regarding the Fair Investment Practices by Venture Capital Companies Act,” the state agency placed on its website in mid-March. “Implementation and enforcement of the (law) will be suspended pending the completion of the rulemaking and until final regulations are in place.”

California lawmakers first passed the measure in 2023, and it was signed by Governor Gavin Newsom shortly after. For decades, women and people of color only received a small share of overall startup funding relative to their representation in the US population. Lawmakers had hoped that more public scrutiny of investment decisions would help promote it greater equity in the market, including for people who are disabled, retired armyor LGBTQ+.

The law called on venture capital and some other investment firms to submit annual reports starting March 1 last year on the overall composition of the founding teams they invested in and the amount of money they provided to various founders. Companies were meant to collect the demographic data through a voluntary survey which was then anonymised. The California authorities planned to publish the files online. Legislators amended the law in 2024 to delay reporting until April 1, 2026 and allow the state to levy daily purposes for non-compliance.

The California Department of Financial Protection and Innovation did not immediately respond to a request for comment on the authority it used to circumvent the deadline set by the legislature. Newsom’s office also did not immediately respond to a request for comment.

Financiers focused on funding entrepreneurs from underrepresented backgrounds supported the law. But the National Venture Capital Association, the technology investment industry’s leading trade group, opposed to it. The group argued that voluntary data collection would inflate diversity statistics and that publishing inaccurate data could lead to unfair attacks on investors who are genuinely trying to tackling diversity issues. Over the past year, the Trump administration has defund and attacked diversity, equity and inclusion, or DEI, initiatives in both the public and private sectors, leading many businesses and organizations to withdraw from them.

In February, the venture capital association wrote to Newsom is asking that the reporting period be pushed back again because, in his opinion, the state has botched the process. Authorities in California didn’t publish the standardized survey that founders were supposed to fill out until early this year, and then they haven’t established a way for firms to register with regulators as required by law, according to the association. “This timeline creates an environment ripe for error and threatens to produce the administratively misleading and counterproductive data we have previously warned against,” wrote association president and CEO Bobby Franklin.

Last month, as the deadline for the first reports approached, some entrepreneurs and investors took to social media to complain about the survey effort. “The latest California malarky is a requirement for venture capitalists to collect/report race and gender statistics,” wrote Blake Scholl, the founder and CEO of venture-backed aviation startup Boom Supersonic. “I want to live in a world where merit matters – not skin color or what you have between your legs.”