Bill Text: CA SB54 | 2023-2024 | Regular Session | Amended

NOTE: There are more recent revisions of this legislation. Read Latest Draft

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Bill Title: Venture capital companies: reporting.

Spectrum: Partisan Bill (Democrat 11-0)

Status: (Passed) 2023-10-08 - Chaptered by Secretary of State. Chapter 594, Statutes of 2023. [SB54 Detail]

Download: California-2023-SB54-Amended.html

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Amended  IN  Senate  April 10, 2023

Amended  IN  Senate  March 20, 2023

Amended  IN  Senate  March 16, 2023

CALIFORNIA LEGISLATURE— 2023–2024 REGULAR SESSION

Senate Bill

No. 54

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Introduced by Senator Skinner

December 06, 2022

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An act to add Chapter 40 (commencing with Section 22949.85) to Division 8 of the Business and Professions Code, relating to professions and vocations.

LEGISLATIVE COUNSEL'S DIGEST

SB 54, as amended, Skinner. Professional investors: fair investment practices. Institutional investors: reporting.

Existing law regulates various interactions with institutional investors, including authorizing licensed finance lenders and brokers to sell promissory notes to repay loans to institutional investors, regulating benefits accruing from specified funds received by real estate brokers who collect payments or provide services for an institutional investor in connection with specified loans, authorizing premium finance companies to issue and sell investment certificates only to, among others, institutional investors, and authorizing licensed residential mortgage lenders and servicers to engage as principals in the business of buying from or selling to institutional investors residential mortgage loans by using or advancing the lender’s or servicer’s own funds.

Existing law establishes the Department of Financial Protection and Innovation (department) in the Business, Consumer Services, and Housing Agency, headed by the Commissioner of Financial Protection and Innovation. Under existing law, the department has charge of the execution of specified laws relating to various financial institutions and financial services, including banks, trust companies, credit unions, finance lenders, and residential mortgage lenders.

This bill, commencing on March 1, 2025, and annually thereafter, would, except as specified, require an institutional investor to submit a report to the department that includes, among other things, the total amount funded to companies primarily founded by an individual who is female or an individual from an underrepresented community as a percentage of the total number of investments the institutional investor made during the prior calendar year and the total amount of money the institutional investor invested in companies primarily founded by an individual who is female or an individual from an underrepresented community as a percentage of the total amount of money invested by the institutional investor during the prior calendar year. The bill would make an institutional investor who fails to comply with these provisions liable for a civil penalty of $100,000 per report in an administrative proceeding brought by the department, and would require the department to publish a list on its internet website by December 31 of each year that includes every institutional investor who failed to comply with these provisions in that year. The bill would define various terms for these purposes. The bill would make related legislative findings and declarations.

Existing law generally prohibits discrimination in the provision of privileges and services on the basis of sex, race, color, religion, ancestry, national origin, disability, medical condition, genetic information, marital status, sexual orientation, citizenship, primary language, and immigration status. Existing law provides a cause of action against any person who denies, aids or incites a denial, or makes any discrimination or distinction on the bases listed, as specified, and permits the recovery of attorney’s fees. Whenever there is reasonable cause to believe that any person or group of persons in engaged in conduct of resistance to the full enjoyment of any of the rights, as specified, and that conduct is intended to deny the full exercise of those rights, existing law authorizes the Attorney General, any district attorney or city attorney, or any person aggrieved by specified conduct to bring a civil action by filing a complaint that includes, but is not limited to, a request for preventive relief. Existing law establishes the Civil Rights Department (department) and makes it responsible for, among other things, investigating and prosecuting complaints alleging a violation of these provisions.

This bill would prohibit a professional investor doing business in California from engaging in specified sexual conduct as a basis for a business investment transaction, engaging in specified sexual conduct that has the purpose or effect of unreasonably interfering with an individual’s working relationship with a person by creating an intimidating, hostile, humiliating, or sexually offensive environment, or discriminating on the basis of a protected characteristic when sponsoring, guaranteeing, granting, or making available funds. The bill would define various terms for these purposes. The bill would authorize an individual, specified local prosecutors, or the Attorney General to bring a civil action for a violation of these provisions, and authorize a court to grant specified relief in that action. The bill would require the department, in consultation with the Attorney General and the Secretary of State, to establish compliance guidelines to assist professional investors in complying with these provisions, as specified, including by advising professional investors to submit a report to the department at least once every 3 years that includes specified information. The bill would make it an affirmative defense in an action described above if the professional investor can demonstrate by a preponderance of the evidence that the professional investor complied with the compliance guidelines and submitted the report within the previous 3 years.

Digest Key

Vote: MAJORITY   Appropriation: NO   Fiscal Committee: YES   Local Program: NO  

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Bill Text

The people of the State of California do enact as follows:

SECTION 1.

 The Legislature finds and declares all of the following:

(a) According to a report by PitchBook, female-founded startups received just 2.3 percent of all venture capital invested in 2020, which was the peak for receiving funding. However, in 2022, that percentage dropped down to 1.7 percent. Startups founded by Black and Latinx individuals received only 2.6 percent and 0.6 percent of venture capital funding, respectively. Furthermore, the same report found that only 8 percent of decisionmakers at venture capital firms were women, and only 3 percent of decisionmakers were Black.

(b) California has a strong interest in promoting diversity and inclusion in the investment activities of institutional investors, particularly those that receive funding from the state’s pension systems.

(c) The pension systems in California have made progress towards promoting diversity and inclusion in their investment activities. For example, the California Public Employees’ Retirement System has developed a Diversity in the Management of Investments initiative to promote diversity among its external investment managers, and the California State Teachers’ Retirement System has adopted a Diversity, Equity, and Inclusion Plan for its investment activities.

(d) The Department of Insurance has established the Invest in Our Diverse Communities initiative, which requires insurance companies to submit an annual report that includes information on the diversity of their governing boards, executive management teams, and total workforce. Insurance companies are also required to develop and implement a diversity and inclusion plan as part of the initiative.

(e) Institutional investors in California provide significant funding to startups, but the lack of diversity in the founding teams of those startups can limit their success and innovation. Institutional investors in California can and should do more to promote diversity and inclusion in the startups they fund, including by gathering and reporting data on the diversity of the founding teams. Data shows that the gender and racial diversity of founding teams has a significant impact on the success and growth of startups.

(f) Therefore, it is the intent of the Legislature to require institutional investors to report on the diversity of the founding teams of the startups they fund to promote greater diversity and inclusion in the California startup ecosystem.

(g) This act aims to increase transparency and promote diversity in the management of investments by institutional investors.

SEC. 2.

 Chapter 40 (commencing with Section 22949.85) is added to Division 8 of the Business and Professions Code, to read:

CHAPTER  40. Institutional Investor Reporting

22949.85.

 For purposes of this chapter, the following definitions apply:

(a) “Department” means the Department of Financial Protection and Innovation.

(b) “Female” means an individual who self-identifies as a woman without regard to the individual’s designated sex at birth.

(c) “Founding team” means a group of individuals who played a significant role in conceiving, developing, and establishing a new company, including, but not limited to, either of the following:

(1) Individuals who collectively own at least 50 percent of a company’s initial shares.

(2) Individuals who have been designated as the chief executive operator, president, or chief financial operator of the new company.

(d) “Individual from an underrepresented community” means an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender.

(e) “Institutional investor” means any of the following that receives funds from a California state pension system, has a physical location in California, or engages in business activities in California:

(1) A corporation or other entity with outstanding securities registered under Section 12 of the federal Securities Exchange Act of 1934 or a wholly owned subsidiary of that corporation or entity, provided that the purchaser represents either of the following:

(A) That it is purchasing for its own account for investment and not with a view to, or for sale in connection with, any distribution of a promissory note.

(B) That it is purchasing for resale pursuant to an exemption under Rule 144A (17 C.F.R. 230.144A) of the Securities and Exchange Commission.

(2) An investment company registered under the Investment Company Act of 1940; or a wholly owned and controlled subsidiary of that company, provided that the purchaser makes either of the representations provided in paragraph (1).

(3) A person who is licensed as a securities broker or securities dealer under any law of this state, or of the United States, or any employee, officer, or agent of that person, if that person is acting within the scope of authority granted by that license or an affiliate or subsidiary controlled by that broker or dealer, in connection with a transaction involving the offer, sale, purchase, or exchange of one or more promissory notes secured directly or indirectly by liens on real property or a security representing an ownership interest in a pool of promissory notes secured directly or indirectly by liens on real property, and the offer and sale of those securities is qualified under the California Corporate Securities Law of 1968 or registered under federal securities laws, or exempt from qualification or registration.

(4) A business development company as defined in Section 2(a)(48) of the Investment Company Act of 1940 or a small business investment company licensed by the United States Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958.

(5) A licensed real estate broker selling the loan to an institutional investor specified in paragraphs (1) to (4), inclusive.

(6) A syndication or other combination of any of the entities described in paragraphs (1) to (5), inclusive, that is organized to purchase a promissory note.

(7) A trust or other business entity established by an institutional investor for the purpose of issuing or facilitating the issuance of securities representing undivided interests in, or rights to receive payments from or to receive payments primarily from, a pool of financial assets held by the trust or business entity, provided that all of the following apply:

(A) The business entity is not a sole proprietorship.

(B) The pool of assets consists of one or more of the following:

(i) Interest-bearing obligations.

(ii) Other contractual obligations representing the right to receive payments from the assets.

(iii) Surety bonds, insurance policies, letters of credit, or other instruments providing credit enhancement for the assets.

(C) The securities will be either one of the following:

(i) Rated as “investment grade” by Standard and Poor’s Corporation or Moody’s Investors Service, Inc. “Investment grade” means that the securities will be rated by Standard and Poor’s Corporation as AAA, AA, A, or BBB or by Moody’s Investors Service, Inc. as Aaa, Aa, A, or Baa, including any of those ratings with “+” or “—” designation or other variations that occur within those ratings.

(ii) Sold to an institutional investor.

(D) The offer and sale of the securities is qualified under the California Corporate Securities Law of 1968 or registered under federal securities laws, or exempt from qualification or registration.

(f) “Publicly held corporation” means a corporation with outstanding shares listed on a major United States stock exchange.

22949.86.

 (a) Commencing on March 1, 2025, and annually thereafter, an institutional investor shall submit a report to the department that includes all of the following:

(1) The name of each business to which the institutional investor made an investment during the prior calendar year.

(2) The total amount the institutional investor invested during the prior calendar year in each business identified pursuant to paragraph (1).

(3) (A) All of the following for the founding team of each business identified pursuant to paragraph (1):

(i) The gender of each individual of the founding team.

(ii) The race of each individual of the founding team.

(iii) The ethnicity of each individual of the founding team.

(iv) The disability status of each individual of the founding team.

(v) The LGBTQ+ of each individual of the founding team.

(B) The information provided pursuant to subparagraph (A) shall be anonymized.

(4) During the prior calendar year, the total amount funded to companies primarily founded by an individual who is female or an individual from an underrepresented community as a percentage of the total number of investments the institutional investor made.

(5) During the prior calendar year, the total amount of money the institutional investor invested in companies primarily founded by an individual who is female or an individual from an underrepresented community as a percentage of the total amount of money invested by the institutional investor.

(b) The department shall make the reports received pursuant to subdivision (a) readily accessible, easily searchable, and easily downloadable on its internet website.

(c) If an institutional investor fails to comply with subdivision (a), the institutional investor shall be liable for a civil penalty of one hundred thousand dollars ($100,000) per report in an administrative proceeding brought by the department.

(d) The department shall publish a list on its internet website by December 31 of each year that includes every institutional investor who failed to comply with subdivision (a) in that year.

(e) Notwithstanding subdivision (a), this section does not apply to either of the following:

(1) An investment made to a publicly held corporation.

(2) A family office, as defined in Section 80b-2(a)(11)(G) of Title 15 of the United States Code.

SECTION 1.Chapter 40 (commencing with Section 22949.85) is added to Division 8 of the Business and Professions Code, to read:

40.Fair Investment Practices by Professional Investors

22949.85.

For purposes of this chapter, the following definitions apply:

(a)“Department” means the Civil Rights Department.

(b)“Compliance guidelines” means the compliance guidelines created by the department pursuant to Section 22949.88.

(c)“Person” means an individual, partnership, firm, joint stock company, corporation, association, trust, estate, or other legal entity.

(d)“Professional investor” means a person whose business includes sponsoring, guaranteeing, or granting funds or engaging in investment transactions.

(e)“Protected characteristic” means race, color, religious creed, national origin, sex, gender identity, sexual orientation, age, genetic information, ancestry, status as a veteran, handicap, or pregnancy or a condition related to said pregnancy including, but not limited to, lactation or the need to express breast milk for a nursing child.

(f)“Protected class” means a group of people sharing a protected characteristic.

22949.86.

A professional investor doing business in California shall not do any of the following:

(a)Make a sexual advance, make a request for a sexual favor, or engage in other sexual conduct, either directly or through an intermediary, when submission to or rejection of that advance, favor, or conduct is made a basis for a business investment transaction.

(b)Make a sexual advance, make a request for a sexual favor, or engage in other sexual conduct, either directly or through an intermediary, when the advance, request, or conduct has the purpose or effect of unreasonably interfering with an individual’s working relationship with a person by creating an intimidating, hostile, humiliating, or sexually offensive environment.

(c)Discriminate on the basis of a protected characteristic when sponsoring, guaranteeing, granting, or making available funds.

22949.87.

(a)Any of the following may bring a civil action against a professional investor for a violation of subdivision (a) of Section 22949.86:

(1)An individual injured by the violation.

(2)A district attorney, county counsel, city attorney, or city prosecutor in the jurisdiction in which the violation occurred in the name of the people of the State of California.

(3)The Attorney General in the name of the people of the State of California.

(b)In an action brought under subdivision (a) a court may grant any of the following:

(1)Statutory damages of five hundred thousand dollars ($500,000) per violation or actual damages, whichever is greater.

(2)Injunctive relief.

(3)Reasonable attorney’s fees and costs.

(4)Punitive damages, except as provided in subdivision (e).

(c)A civil action under this section shall be commenced within three years after the date of the violation of subdivision (a) of Section 22949.86.

(d)It shall be an affirmative defense against a cause of action for violation of paragraph (3) of subdivision (a) of Section 22949.86 if the professional investor can demonstrate both of the following by a preponderance of the evidence:

(1)The professional investor complied with the compliance guidelines.

(2)The professional investor submitted the report described in paragraph (3) of subdivision (a) of Section 22949.88 within the previous three years.

(e)All remedies accruing under this chapter are cumulative to each other and to the remedies available under any other law.

22949.88.

(a)By January 1, 2025, the department, in consultation with the Attorney General and the Secretary of State, shall establish compliance guidelines to assist professional investors in complying with the requirements of this chapter. The guidelines, at a minimum shall advise professional investors to do all of the following:

(1)Include a policy in the professional investor’s organizational charter that details how the professional investor will comply with this chapter.

(2)Adopt clear procedures for the professional investor’s operations to ensure that the professional investor and their employees and agents comply with this chapter.

(3)Submit a report to the department at least once every three years that includes all of the following information:

(A)The number of investments made.

(B)The size of each investment.

(C)Demographic information for the recipient of each investment, including, but not limited to, any protected characteristic.

(4)Comply with the rules, regulations, and other guidance developed by the department pursuant to subdivision (c).

(b)The department, in consultation with the Attorney General and the Secretary of State, shall update the compliance guidelines as needed and at least once every three years.

(c)The department shall promulgate rules, regulations, or other guidelines to implement this section, which may include model templates for a professional investor to modify and adopt.