California Senate Bill 54 (SB 54) creates a new “Venture Capital Diversity Reporting Program” that requires certain investment firms with a California nexus to collect demographic information about portfolio company founding team members and report aggregated statistics annually to the California Department of Financial Protection and Innovation (DFPI) beginning in April 2026.
Although the law is framed as a venture capital transparency measure, it can touch private equity managers in ways that are not always obvious—especially managers growth equity, early-stage, or multi-strategy platforms.
Why SB 54 can matter to private equity firms
SB 54’s scope is driven less by whether a firm calls itself “private equity” or “venture capital,” and more by how its strategies operate in practice, how its funds are structured, and whether it has meaningful ties to California. This functional, facts-and-circumstances approach is why many private equity sponsors—particularly those pursuing growth equity or hybrid strategies—must carefully assess applicability rather than assuming the law does not apply.
SB 54 applies to “covered entities,” which are defined broadly and turn in part on whether the manager or fund qualifies as a “venture capital company” under California rules and related cross-references. The practical implication is that a sponsor commonly thought of as “private equity” can still be in-scope if it meets one of the venture capital company tests, which are extremely broad. The breadth of the definition may capture entities that do not consider themselves VC firms and could include private equity funds.
In addition, the “California nexus” hooks can be triggered not only by being headquartered in California, but also by having investments, investors, or other ties to the state—meaning a manager outside California may still be pulled in depending on its footprint.
The key uncertainty: private equity vs. venture capital strategies
Applicability of SB 54 turns on whether an entity qualifies as a “Covered Entity” under the statute, which is determined through a multi-step analysis rather than by labels alone.
California Nexus
The threshold inquiry is whether a firm has a sufficient California nexus. An entity may satisfy this requirement not only by being headquartered or maintaining a significant operational presence in California, but also by making venture capital investments in businesses located in, or with significant operations in, California. In addition, soliciting or receiving investments from California residents can independently establish the requisite nexus. As a result, a private equity sponsor with no physical presence in California may still meet this element based on its investor base or portfolio footprint.
Investment Activities
If a California nexus exists, the analysis then shifts to the nature of a firm’s investment activities. SB 54 focuses on entities that primarily engage in the business of investing in or financing startup, early-stage, or emerging growth companies. These terms are not defined in the statute, creating interpretive uncertainty. While seed-stage investing is clearly contemplated, the lack of clear boundaries means that growth equity strategies—and certain minority or expansion investments by private equity sponsors—may raise questions as to whether the firm’s investment activity fall within scope.
“Venture Capital Company”?
If a firm’s investment activity meets the above functional test, the final step is determining whether the firm qualifies as a “venture capital company.” SB 54 incorporates existing regulatory concepts rather than creating a standalone definition. An entity may be treated as a venture capital company if at least 50 percent of its assets consist of venture capital investments. Venture capital investments are generally understood to mean equity (or equity-like) investments in operating companies where the investor has management rights. But SB 54 itself never spells this out.
Additionally, an entity qualifies as a venture capital company if it qualifies as a “venture capital fund” under the Advisers Act framework, or if it is treated as a venture capital operating company (VCOC) for ERISA purposes. Importantly, these tests can apply at the fund or entity level, meaning a multi-strategy private equity platform may have certain funds in scope even if the broader firm is not.
The breadth and uncertainty of specific terms in SB 54 should cause many lower-middle market and growth equity private equity firms to be concerned. Absent additional guidance, private equity sponsors investing in “emerging growth companies” (which is undefined) where they obtain management rights may be in scope of SB 54.
Reporting Obligations
Being deemed a “Covered Entity” under California Senate Bill 54 (SB 54) carries meaningful operational, compliance, and regulatory implications for an investment firm.
First, Covered Entities must collect demographic information on the founding team members of each portfolio company that received a qualifying investment during the prior calendar year. This is done through a DFPI-prescribed, voluntary, anonymized survey delivered after the investment is made. Although participation by founders is optional, the obligation to distribute the survey is mandatory.
Second, Covered Entities must annually report aggregated demographic data to the California DFPI, beginning April 1, 2026, covering investments made in calendar year 2025. Required reporting includes gender, race, ethnicity, disability status, LGBTQ+ identification, veteran status, and the amount and percentage of venture capital investments allocated to businesses founded by diverse founding teams.
Third, Covered Entities must register contact information with the DFPI by March 1, 2026, and maintain systems to track in-scope investments, portfolio companies, and survey responses on an ongoing basis.
From a risk perspective, failure to comply can result in regulatory penalties, following notice and a 60-day cure period. In addition, the collection of sensitive demographic data heightens privacy, data security, and governance considerations, requiring careful coordination among legal, compliance, deal teams, and third-party vendors.
In short, Covered Entity status under SB 54 transforms diversity reporting from a policy objective into a regulated compliance obligation, with real operational and enforcement consequences.
How Trillium Can Help
Testing and Surveillance: A core pillar of Trillium’s compliance support is rigorous testing of your firm’s practices in key risk areas—benchmarking them against policies, procedures, and disclosures to uncover gaps, mitigate risk, and drive meaningful improvement.
Regulatory Change Preparedness:
Trillium actively monitors regulatory developments and translates new rules, guidance, and enforcement priorities into clear, actionable impact assessments for your firm. By initiating implementation early, Trillium helps clients stay compliant, reduce execution risk, and remain ahead of regulatory change rather than reacting to it.