A California law requiring venture capital firms to report the race, gender, and sexual orientation of the companies they fund is being challenged in federal court, the California Globe reports. Attorneys for the Colorado-based 1517 Fund contend that the law is unconstitutional. Californians can make a case that the measure also violates the spirit of a state law the people approved in 1996.
The Fair Investment Practices by Venture Capital Companies Act, now being challenged, derives from California Senate Bill 54, by Berkeley Democrat Nancy Skinner. The 2023 measure applies to any companies in the country and seeks to steer investments to those who identify as “a woman, nonbinary, Black, African American, Hispanic, Latino-Latina, Asian, Pacific Islander, Native American, Native Hawaiian, Alaskan Native, disabled, veteran or disabled veteran, lesbian, gay, bisexual, transgender, or queer.” Venture capital companies must file reports with the California Civil Rights Department.
“This bill resonates deeply with my commitment to advance equity and provide for greater economic empowerment of historically underrepresented communities,” said Governor Gavin Newsom in his signing message. On the other hand, the National Venture Capital Association contends that SB 54 would “produce misleading and counterproductive data that would hurt the cause of diversity, equity, and inclusion (DEI) efforts while creating unnecessary costs and risks for California venture capitalists.” For the 1517 Fund, it’s a different issue.
“This case is about whether the government can force private citizens to operate a racial classification scheme,” Pacific Legal Foundation (PLF) attorney Wilson Freeman told the California Globe. “The First Amendment protects the right against compelled speech; forcing venture capital companies to interrogate their founders [about] their race and sexuality, on the government’s script, violates that principle.”
Founded in 2015 by Danielle Strachman and Michael Gibson, the 1517 Fund screens overlooked talent for ideas and potential. Requiring venture capital funders to enforce a DEI regime, PLF contends, “pressures venture capitalists to make investment decisions based on race, ethnicity, and gender, rather than on merit and innovation.”
In a similar style, the California Civil Rights Initiative (CCRI) banned racial and ethnic preferences in state education, employment, and contracting. The initiative, Proposition 209 on the November, 1996 ballot, passed by a margin of 54-46. As Thomas Sowell showed in Intellectuals and Race, CCRI did not harm “diversity,” and after passage, the number of African-American and Hispanic students graduating from the University of California system increased.
California’s education establishment opposed the measure from the start, and in 2020, the people defeated Proposition 16, a measure to eliminate CCRI by 57.23 to 42.77 percent, a bigger margin than in 1996. Despite the will of the people, California built a vast DEI establishment that consumes millions of taxpayer dollars while doing nothing to improve student outcomes or address budgetary concerns.
Unlike the California Civil Rights Initiative and the People’s Initiative to Limit Property Taxation (Proposition 13), the people of California never got to vote on the Fair Investment Practices by Venture Capital Companies Act. The lawsuit against the measure, filed in the United States District Court for the Eastern District of California, is 1517 Fund v. KC Mohseni.
Khalil “KC” Mohseni is commissioner of the California Department of Financial Protection & Innovation (DFPI). The Commissioner is “committed to the Department’s mission to protect consumers and foster trust and innovation in the financial marketplace.” If Californians thought the Senate Bill 54 did not foster innovation, it would be hard to blame them.
The Pacific Legal Foundation, meanwhile, has been active against the California Coastal Commission (CCC), which overrides scores of city and county governments on land-use issues and rides roughshod over property rights. Candidates for governor of California have little if anything to say about the unelected CCC and California Air Resources Board (CARB), a longtime promoter of high gasoline prices and stifling regulation.
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Lloyd Billingsley is a policy fellow at the Independent Institute in Oakland, Calif.
