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Legislative Changes Are Poised to Shift the Startup Investing Landscape

Updated: Apr 30

The startup ecosystem has seen significant changes around data and transparency this year. Many of these laws are working to expand access to funding and protect both startups and limited partners in funds. This momentum showcases significant changes in operations and data that investors need to begin to prepare for.

In this guide, we cover recent legislative actions that will impact the way investors operate and invest in startups.


In April 2023, the Developing and Empowering Our Aspiring Leaders (DEAL) Act was passed as part of the Expanding Access to Capital Act of 2023. The DEAL Act was created to expand the types of investments that can qualify for venture capital exemption.

Typically, fund managers must allocate the majority of their portfolio to direct investments in private companies to qualify for exemption from SEC registration under the venture capital exemption. This means that venture capital funds limit their acquisitions of private assets through secondary sales and investments in other funds or special purpose vehicles, which are typically used in startup investment.

The DEAL Act would classify a fund’s investment in a qualifying portfolio company - including secondary transactions and special purpose vehicles - as a qualifying investment, as long as most of the fund’s qualifying investments are composed of direct investments in portfolio companies. The DEAL Act will also re-classify fund investments in other venture capital funds as qualifying investments. Taken together, these reclassifications of venture funds increase the sector’s ability to support innovative, high-growth companies, like startups.

SEC Private Fund Advisor Reforms

Though not as expansive as anticipated, these updated rules affect both registered and exempt fund advisors. These rules are intended to provide protections for limited partners and in turn all individuals that indirectly are invested in those firms via pensions, endowment funds and retirement plans.

For registered private fund advisors, quarterly reports around performance, fees and expense are required as well as an annual audit. They also now require a second opinion on valuation for secondary transactions. For all fund advisors, this prohibit preferential treatment, including side letters, that have negative effect on other investors without notice and prevent investment. They also restrict activity that is seen to inflict investor harm mainly around the transparency of fees. All registered advisors will be required to document their annual review of compliance polifices and procedures.

California’s Senate Bill 54

On September 11, 2023, California made history by passing Senate Bill 54 (SB 54), which is poised to become the nation's first legislation aimed at increasing diversity in the world of venture capital.

One of the central issues addressed by SB 54 is the stark lack of diversity in venture capital investments within the state of California. Despite being one of the most ethnically and culturally diverse regions in the world, venture capital funding in California does not reflect this diversity. Mirroring investment trends globally, California companies founded or co-founded by women received significantly less investment than those founded by men. In the previous year, VC funding for Black founders plummeted by a staggering 45 percent.

To tackle these issues, SB 54 will mandate that venture capital companies operating in California submit an annual report detailing their investments to the Department of Financial Protection and Innovation. These reports will include crucial information such as the gender, ethnic and racial background of the founders they fund, along with the amount of funding provided.

The bill also requires firms to collect and publicly release their diversity data. This step is expected to encourage self-reflection and accountability within the industry. Firms that violate these terms will face investigation and potential penalties, as determined by the courts.

Massachusetts’ Senate Bill 978 and House Bill 1708

These two bills, both called “An Act Relative to Fair Investment Practices”, aim to extend workplace sexual harassment and gender discrimination protections to venture capital and equity investor relationships. Private investors such as venture capitalists, are not subject to federal or state sexual harassment and discrimination laws, which could lead to investment environments that include discrimination and predatory practices such as sexual harassment.

These bills will make it unlawful for any person in the business of granting funds or engaging in investment transactions to abuse investor power through sexual harassment. The bills also aim to create a compliance-based approach to discrimination regulation similar to the Federal Fair Lending Laws. Supporters hope that passage of this legislation will decrease instances of sexual harassment and discrimination. These changes to the investment ecosystem could encourage more women and minorities entrepreneurs, and benefit the business community with greater economic growth.


Are you ready for these changes? Fundr can help make data collection and reporting easy. Reach out to us today to learn more about how we can help you prepare for this siesmic industry shift.

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