DFPI Proposes Rulemaking on California’s Mandatory Diversity Reporting for VC Fund Managers and Is Challenged in Federal Court

While the implementation and enforcement of the California Department of Financial Protection and Innovation’s (DFPI) Fair Investment Practices by Venture Capital Companies Law (the “California Diversity Reporting Law”) remain suspended, there have been several notable updates in the past few weeks regarding the future of the California Diversity Reporting Law and the broader regulatory regime in California.

What You Need to Know

• DFPI has published an Invitation for Comments on Proposed Rulemaking on the California Diversity Reporting Law, with comments due by July 17, 2026. The invitation constitutes informal, pre-rulemaking activity and includes a sizeable list of questions for VCs and other interested parties to address, demonstrating the DFPI’s desire to engage with stakeholders to craft a final regulation that meets the objectives of the California Diversity Reporting Law.
• A Colorado-based venture capital firm is challenging the law. Citing alleged constitutional violations, 1517 Management Company, LLC filed suit against the DFPI, claiming that the law violates free speech and equal protection rights for covered entities.

Invitation for Comments on Proposed Rulemaking

On May 26, 2026, the DFPI released an invitation for public comments to solicit stakeholder feedback prior to its publication of a formal Notice of Proposed Rulemaking. The invitation seeks public comments and asks comprehensive questions on the California Diversity Reporting Law’s registration, survey, and reporting requirements. The invitation constitutes informal, pre-rulemaking activity and does not trigger the one-year deadline under the California Administrative Procedure Act applicable to formal rulemaking proceedings. Although comments submitted during this stage are not part of the formal CA APA rulemaking, they are likely to shape the proposed regulations that DFPI ultimately publishes.

The DFPI’s invitation for public comments includes a list of questions organized by subject matter, including:

The Definition of “Covered Entity”

In response to stakeholder concerns that the statutory definition of a “covered entity” is both overly broad and ambiguous, the DFPI seeks comments on how to define certain terms in relation to this definition, including “startup,” “early-stage,” and “emerging growth company.” In particular, the DFPI seeks input regarding when a venture capital company should be considered “primarily” engaged in the business of investing in, or providing financing to, startup, early-stage, or emerging growth companies, including whether that determination should factor in time, resources, or another metric. The DFPI also requests comments regarding:

• The definitions of “significant presence” and “significant operations”;
• Whether the definition of “headquartered in California” is clear or should be amended; and
• Whether the definition of “solicits or receives investments from a person who is a resident of California” should include additional types of persons, not just investors.

Registration and Reporting Requirements

The DFPI also seeks comments on a key issue for many venture capital funds: whether all venture capital investments in the prior calendar year should be reported, including follow-on investments from a prior calendar year commitment, or only new, first-time investments. Additionally, if follow-on investments are captured, the DFPI requests feedback on whether founding team members should be re-surveyed every year an investment is made and whether prior year responses should be used in case of nonresponses from founding team members. The DFPI also requests comments on:

• How to define “control” for purposes of providing a report prepared by a business that controls each covered entity at any time during the prior calendar year;
• Whether investments in businesses outside of the U.S. should be reported;
• Whether venture capital companies that meet the definition of covered entity at any point in a calendar year, but do not meet the definition as of the end of year, should be required to register; and
• Whether covered entities should be required to register electronically on the DFPI web portal and whether covered entities should be required to register if they did not make any venture capital investments in the prior calendar year.

Survey and Aggregated Annual Report

Also of interest to many stakeholders, the DFPI is requesting comments on whether the definition of “founding team members” requires clarification and whether covered entities should be able to rely on businesses receiving a venture capital investment to deliver the survey to founding team members, or whether the covered entity should be required to directly deliver the survey to founding team members. The DFPI requests comments on:

• What accommodations might be necessary to ensure that survey response data is not associated with an individual founding team member;
• What location should be considered the “principal place of business”;
• Whether covered entities must report the amount of each investment at the business level or on the aggregate amount invested;
• Whether covered entities must use the exact survey published by DFPI or whether alternative survey platforms or document formats should be allowed;
• How covered entities can ensure that the information reported to DFPI accurately reflects the demographic information of founding team members for purposes of determining whether an investment was “primarily founded by diverse team members”; and
• Whether the statutory formulas used to calculate and report demographic investment metrics are accurate and sufficiently clear, or whether there should be alternative language or revised formulas.

Other Questions

The DFPI also requests comments on various issues, including fees and records retention. Regarding fees, the DFPI specifically requests comments on whether the DFPI should charge uniform fees or deploy a tiered fee system based on the annual dollar amount invested by the covered entity during the reporting year.

Lawsuit Challenging California Diversity Reporting Law on Constitutional Grounds

On May 28, 2026, 1517 Management Company, LLC (“1517”), a Colorado-based venture capital firm, filed a federal lawsuit in the Eastern District of California against the DFPI alleging the California Diversity Reporting Law violated the First Amendment, the Equal Protection Clause, the Dormant Commerce Clause, and the Due Process Clause. 1517 is seeking declaratory and injunctive relief barring enforcement of the law, including a declaration that the California Diversity Reporting Law is facially unconstitutional.

Specifically, 1517 alleges that the law compels speech by requiring venture capital firms to engage in sensitive conversations and collect demographic information from founders. The firm also alleges that the California Diversity Reporting Law imposes a content-based restriction on covered entities by mandating the use of the survey form created and distributed by the DFPI.

1517 also alleges that the California Diversity Reporting Law violates the Equal Protection Clause by pressuring venture capital firms to consider race in their investment decisions.

The suit also alleges that the California Diversity Reporting Law runs afoul of the dormant commerce clause and the due process clause by extending California’s regulatory authority to venture capital firms, founding team members, and transactions lacking significant contacts with the state.

On June 10, 2026, the DFPI filed a joint stipulation extending the time to respond to the complaint until July 21, 2026.

Looking Ahead

The DFPI’s Invitation for Comments signals a strong institutional commitment to developing a workable regulatory framework for the California Diversity Reporting Law. As noted above, because the invitation constitutes informal, pre-rulemaking activity, the one-year deadline under the California Administrative Procedure Act for formal rulemaking proceedings has not yet been triggered.

The breadth and specificity of the questions posed reflect the DFPI’s desire to engage meaningfully with venture capital firms and other stakeholders to craft regulations that implement the California Diversity Reporting Law while addressing practical compliance questions and litigation pressure. Venture capital firms and other interested parties should consider submitting comments by the July 17, 2026 deadline and continue to monitor developments in both the rulemaking process and the pending litigation.