The Franchise Investment Law generally requires a franchisor to register with the Department of Business Oversight before an offer or sale of a franchise in this state and provides that a willful violation of this law is a crime. Existing law provides, among other things, that an offer or sale of a franchise is made in this state when an offer to sell is made in this state, or an offer to buy is accepted in this state, or, if the franchisee is domiciled in this state, the franchised business is or will be operated in this state. Existing law provides that an offer to sell is not made in this state merely because a radio or television program originating outside this state is received in this state.

This bill would provide, until January 1, 2020, that an offer to sell is not made in this state merely because a prospective franchisor, or a franchisor who is not then offering a franchise for sale in California and has not registered an offering under the Franchise Investment Law, secures a space at a franchise trade show from which it offers information about its products, services, or system to the general public under specified circumstances, including, among others, the payment of a fee. The bill would also define a franchise trade show for purposes of the Franchise Investment Law.

The Franchise Investment Law generally requires a franchisor to register with the Department of Business Oversight before an offer or sale of a franchise in this state and provides that a willful violation of this law is a crime. Existing law provides, among other things, that an offer or sale of a franchise is made in this state when an offer to sell is made in this state, or an offer to buy is accepted in this state, or, if the franchisee is domiciled in this state, the franchised business is or will be operated in this state. Existing law provides that an offer to sell is not made in this state merely because a radio or television program originating outside this state is received in this state.

This bill would provide than provide, until January 1, 2020, that an offer to sell is not made in this state merely because a prospective franchisor, or a franchisor who is not then offering a franchise for sale in California and has not registered an offering under the Franchise Investment Law, secures a space at a franchise trade show from which it offers information about its products, services, or system to the general public under specified circumstances. circumstances, including, among others, the payment of a fee. The bill would also define a franchise trade show for purposes of the Franchise Investment Law.

The Franchise Investment Law generally requires a franchisor to register with the Department of Business Oversight before an offer or sale of a franchise in this state and provides that a willful violation of this law is a crime. Existing law provides, among other things, that an offer or sale of a franchise is made in this state when an offer to sell is made in this state, or an offer to buy is accepted in this state, or, if the franchisee is domiciled in this state, the franchised business is or will be operated in this state. Existing law provides that an offer to sell is not made in this state merely because a radio or television program originating outside this state is received in this state.

This bill would provide than an offer to sell is not made in this state merely because a prospective franchisor, or a franchisor who is not then offering a franchise for sale in California and has not registered an offering under the Franchise Investment Law, secures a space at a franchise trade show from which it offers information about its products, services, or system to the general public under specified circumstances. The bill would also define a franchise trade show for purposes of the Franchise Investment Law and would authorize a franchisor to offer a franchise for sale at a franchise trade show, as specified. Law.

The Franchise Investment Law generally requires a franchisor to register with the Department of Business Oversight before an offer or sale of a franchise in this state and provides that a willful violation of this law is a crime. Existing law provides, among other things, that an offer or sale of a franchise is made in this state when an offer to sell is made in this state, or an offer to buy is accepted in this state, or, if the franchisee is domiciled in this state, the franchised business is or will be operated in this state. Existing law provides that an offer to sell is not made in this state merely because a radio or television program originating outside this state is received in this state.

This bill would provide than an offer to sell is not made in this state merely because a franchisor who is not then offering a franchise for sale in California and has not registered an offering under the Franchise Investment Law secures a space at a franchise trade show from which it offers information about its products, services, or system to the general public under specified circumstances. The bill would also define a franchise trade show for purposes of the Franchise Investment Law and would authorize a franchisor to offer a franchise for sale at a franchise trade show, as specified.

GOVERNOR'S VETO

GV Bill Id:AB 1782

Author:(Maienschein)

As Enrolled Ver:September 6, 2016

2/3 vote

Original Committee Reference: JUD.

SUMMARY: Authorizes companies that have not registered with the Department of Business Oversight (DBO) to sell franchises in California to exhibit at a franchise trade show if specified disclosures are made to the DBO and to trade show attendees, and an exemption fee is paid to the DBO. Specifically, this bill:

1. Provides that an offer to sell is not made in this state merely because a prospective franchisor, or a franchisor who is not then offering a franchise for sale in California and has not registered an offering under state law, secures a space at a franchise trade show from which it offers information about its products, services, or system to the general public if the franchisor or prospective franchisor does all of the following:
   1. Notifies the commissioner of its intent to attend and display its concept at the franchise trade show at least 30 days before the show, in a form established by the commissioner.
   2. Accompanying the above notification, provides the commissioner with: i) a document that, at a minimum, describes the potential franchise offering and identifies the legal name of the company, its principal officers and business addresses; ii) a copy of the franchise disclosure document (FDD), if it already possesses a current FDD not yet registered in California; iii) disclosure of any crimes or adverse actions, as specified, against any corporate directors or officers, or any employees or representatives attending the franchise trade show; and iv) the proposed information that the franchisor intends to distribute or use at the trade show.
   3. Conspicuously posts in public view within its franchise trade show booth a notice, in a form established by the commissioner, that states, at a minimum, that the franchisor or prospective franchisor is not offering a franchise for sale in California, is not legally able to offer a franchise for sale in California, and that if anyone associated with the franchisor or prospective franchisor offers a franchise for sale or solicits an offer to purchase a franchise in California, that action should be reported to the commissioner.
2. Requires the notification of intent to attend and display at a trade show in 1)a) above, to state, at a minimum, that it is unlawful for any person to offer or sell a franchise in California unless the offer of the franchise has been registered with the commissioner or is otherwise exempt under California law.
3. Requires a payment of a $225 fee to the DBO for each day the franchisor or prospective franchisor exhibits at the trade show.
4. Defines "franchise trade show" to mean an event in this state, displaying multiple franchise brands and open to multiple franchisors, that is advertised to, and invites, the general public to that event where franchisors who satisfy the reasonable criteria of the franchise trade show's organizer may secure a space from where they can inform the members of the general public in attendance about their existing and prospective products, services, or systems.
5. Authorizes the commissioner to summarily issue a stop order denying the effectiveness of an applicant's exemption application if the commissioner finds any of the following:
   1. The proposed business model is not lawful in California.
   2. A director, trustee, general partner, principal officer, or other executive who will have management responsibility of a franchisor or prospective franchisor, or an employee or representative who will be attending the franchise trade show on behalf of the franchisor or prospective franchisor, has been: i) convicted of or pleaded nolo contendere to any felony; ii) held liable in a civil action by final judgment of a court for fraud, embezzlement, or misappropriation of property; or iii) previously violated any franchise law of any state.
   3. The business would constitute a misrepresentation to, or deceit or fraud of, investors.
   4. The franchisor or prospective franchisor fails to meet the notification requirements described in 1) and 2) above.
6. Provides that appeal of the denial of the stop order described above is governed by procedures already specified by existing law, Corporations Code Section 31117
7. Establish a sunset date of January 1, 2022, for all of these provisions

The Senate amendments:

1. Require prospective franchisors to make additional disclosures, including the proposed information it intends to distribute, to the DBO commissioner as part of its notification of intent to attend and display at a trade show.
2. Require a payment of a $225 fee to the DBO for each day the franchisor or prospective franchisor exhibits at the trade show.
3. Authorize the DBO commissioner to issue a stop order denying a franchisor's exemption application for failure to meet specified criteria, and provides that appeal of the denial of this type of stop order is governed by procedures already specified by existing law.
4. Establish a sunset date of January 1, 2022 for all of these provisions.

FISCAL EFFECT: According to the Senate Appropriations Committee, this bill will result in unknown, moderate costs to DBO to create an application form for franchisors and prospective franchisors and unknown, but potentially significant costs to DBO to investigate any reported violations of the provisions of this bill.

COMMENTS: The California Franchise Investment Law (CFIL) generally prohibits a franchisor from selling a franchise in California unless prior to the sale the franchisor has, among other things: 1) registered with the DBO to sell franchises in California; 2) prepared a disclosure document containing certain information specified in the CFIL; and 3) provided the franchisee with a copy of the disclosure document at least 14 days before entering into any contract or receiving any payment from the franchisee. (Corporations Code Section 31110 et seq.) The DBO establishes regulations specifying the procedural and substantive requirements for registration.

According to the sponsor, the DBO considers a franchisor's exhibit at a trade show to be an illegal offer of a franchise, whether or not a sale occurs, if the franchisor has not first registered their offering with the DBO pursuant to the CFIL. As a result, the ability to exhibit a booth at a franchise trade show requires a company to comply with the full process for registering a franchise offer in California, even if the company does not yet plan to offer or sell franchises. This may occur because, for example, it is a foreign or out-of-state company seeking to measure interest in its franchise in California, or it is a young company in early development and not yet prepared to sell franchises.

According to the author, this bill is needed to remove barriers to potential new franchise investment in California, particularly by foreign companies or prospective franchisors not registered with DBO but simply seeking to participate in trade shows prior to any formal intent to offer franchises for sale. Proponents contend that trade shows are of great potential benefit to prospective franchisors because they could gain valuable insight from comments and suggestions made at trade shows by other franchisors and attendees. According to the sponsor, "there is no single event or forum other than trade shows where they can be exposed to this valuable information" and that this information "would allow the franchisor to make changes or adjustments to its program to produce a franchise that is more likely to be successful for both the franchisor and franchisees."

Supporters contend that the length of the registration process can discourage some franchisors from using trade shows to explore the potential for expansion into California. They state that "since franchisors have little control over, or visibility into, the length of the registration process, an exemption (from registration) would save some franchisors from missing trade shows that are often critical to their evaluation of growth potential or anticipated expansion into the California market."

Expanding opportunity for unregistered and prospective franchisors in California to exhibit at trade shows. This bill seeks to create an avenue for unregistered franchisors and prospective franchisors to operate an exhibition booth at a California trade show, while still maintaining consumer protections restricting the offer and sale of franchises. (As used hereafter, the term "unregistered franchisor" shall be considered to include prospective franchisors as well.) In light of the DBO's interpretation of the statute that an unregistered franchisor's exhibit at a trade show constitutes an impermissible offer to sell a franchise, this bill specifically provides that an offer to sell is not made merely because the unregistered franchisor has secured a space at a franchise trade show and offers information about its products, services, or system to the general public, as long as the party discloses certain information about its franchise concept, principal officers, and business addresses to the public and the DBO, as a specified.

First, the unregistered franchisor must notify the DBO of its intent to attend and display its concept at the trade show at least fourteen days before the show. Second, the unregistered franchisor must provide the DBO with additional documentation identifying its business, addresses, and principal officers, as specified. If the company already has a current franchise disclosure document not yet registered in California, then it must also provide a copy to the DBO with the above documentation. Finally, the unregistered franchisor must conspicuously post, in public view within its booth at the trade show, a specified notice cautioning attendees that it is not offering a franchise for sale in California, and that it is not legally able to offer a franchise for sale in California. This notice must also include, at a minimum, the DBO commissioner's contact information and a statement that if anyone associated with the franchisor offers a franchise for sale, or solicits an offer to purchase a franchise in California, that action should be reported to the commissioner. Together, these requirements are intended to increase the DBO's ability to maintain oversight and recordkeeping over unregistered companies exhibiting at franchise trade shows before they have officially registered as franchisors in California.

Notification to prospective franchisors of duty to register with DBO before a franchise may be offered or sold. Because companies allowed to exhibit at franchise trade shows under this bill may be either inexperienced in franchising or from another state or country, they may not yet be familiar with California franchise laws. In order to safeguard against possible violations of the CFIL by these actors, the bill requires the DBO-approved form used by an unregistered franchisor to indicate its intent to attend and exhibit at a trade show (see above) to also provide a reminder to the company of its duty to register with the DBO before it may legally offer or sell a franchise in this state. The bill preserves the discretion of DBO to determine the form and content of the overall notice, but does require this specific information to be included, at a minimum, in the final document approved by DBO.

Recent amendments require prospective franchisors to disclose additional identifying information to enable DBO oversight. According to proponents, many of the companies who stand to benefit from participating in trade shows under this bill are either young companies exploring whether to get into the business of selling franchises, or companies already franchised in another state or another country--in either case, unregistered as a franchisor in California and likely to be unknown to DBO. To safeguard against the possibility that members of the public may be victimized by unscrupulous trade show exhibitors who engage with prospective consumers, the author recently amended the bill to require any unregistered franchisor wishing to exhibit at a trade show to provide the commissioner of DBO with a document containing identifying information about the business and its officers. Specifically, this document, at a minimum, shall include: 1) the franchise concept brand name and a brief description of the potential franchise offering; 2) the name of the parent corporation or controlling entity, and the address where it is domiciled; 3) the names of the executive officers of the parent corporation or controlling entity; and 4) the address where the corporation or entity may be served legal process. Require prospective franchisors to make additional disclosures, including the proposed information it intends to distribute, to the DBO commissioner as part of its notification of intent to attend and display at a trade show. Disclosure of this information to DBO is intended to protect consumers and ensure that DBO has sufficient information about the unregistered franchisor for oversight purposes, including the ability to track down and further investigate the company if some problem is later reported as a result of its participation in the trade show.

In addition, the bill requires that any unregistered franchisor that already possesses a current franchise disclosure document to provide DBO with a copy of that disclosure document as a condition of being allowed to exhibit at a trade show. The Committee notes that, under Federal Trade Commission (FTC) rules, any company selling a franchise anywhere in the United States is already required to possess a FDD that they provide to prospective franchisees (16 Code of Federal Regulations Part 436.2). Therefore, this requirement will likely be a mere formality for existing out-of-state franchisors may enhance DBO oversight by providing relevant, detailed information about the franchise brand and the company itself. For companies without a FDD (for example, because they are still in the startup phase or because they are foreign-based), this requirement does not apply and poses no obstacle. It should be noted, though, that under the CFIL, a franchisor must ultimately complete the full registration process and submit the franchise disclosure document to DBO before it may offer or sell franchises in California in any case.

Additional amendments. Recent Senate amendments authorize the DBO commissioner to issue a stop order denying a franchisor's exemption application for failure to meet specified criteria, including, for example, that the proposed business model is not lawful in California, or that any corporate directors, officers, or employees or representatives who will be attending the franchise trade show on behalf of the franchisor or prospective franchisor have been 1) convicted of or pleaded nolo contendere to any felony; 2) held liable in a civil action by final judgment of a court for fraud, embezzlement, or misappropriation of property; or 3) previously violated any franchise law of any state. As amended the bill also authorizes an appeal of the denial of this type of stop order, which is to be governed by procedures pursuant to existing law, Section 31117 of the Corporations Code. Finally, recent Senate amendments require the prospective franchisor to pay a $225 fee to the DBO for each day the franchisor or prospective franchisor exhibits at the trade show, and establish a sunset date of January 1, 2022 such that all of these provisions will be in effect for five years before they are repealed of their own accord.

GOVERNOR'S VETO MESSAGE:

This bill authorizes franchisors to exhibit at franchise trade shows without first registering with the Department of Business Oversight (Department).

Registration gives the Department the opportunity to review franchise disclosure documents and ensure that franchisors are providing accurate information to potential customers. Allowing unregistered franchisors to market at these events without verifying their eligibility to do business in California is a step in the wrong direction.

Analysis Prepared by: Anthony Lew / JUD. / (916) 319-2334 FN: 0005058

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 1782

Author:(Maienschein)

As Amended Ver:August 19, 2016

Majority vote

Original Committee Reference: JUD.

SUMMARY: Authorizes companies that have not registered with the Department of Business Oversight (DBO) to sell franchises in California to exhibit at a franchise trade show if specified disclosures are made to the DBO and to trade show attendees, and an exemption fee is paid to the DBO. Specifically, this bill:

1. Provides that an offer to sell is not made in this state merely because a prospective franchisor, or a franchisor who is not then offering a franchise for sale in California and has not registered an offering under state law, secures a space at a franchise trade show from which it offers information about its products, services, or system to the general public if the franchisor or prospective franchisor does all of the following:
   1. Notifies the commissioner of its intent to attend and display its concept at the franchise trade show at least 30 days before the show, in a form established by the commissioner.
   2. Accompanying the above notification, provides the commissioner with: i) a document that, at a minimum, describes the potential franchise offering and identifies the legal name of the company, its principal officers and business addresses; ii) a copy of the franchise disclosure document (FDD), if it already possesses a current FDD not yet registered in California; iii) disclosure of any crimes or adverse actions, as specified, against any corporate directors or officers, or any employees or representatives attending the franchise trade show; and iv) the proposed information that the franchisor intends to distribute or use at the trade show.
   3. Conspicuously posts in public view within its franchise trade show booth a notice, in a form established by the commissioner, that states, at a minimum, that the franchisor or prospective franchisor is not offering a franchise for sale in California, is not legally able to offer a franchise for sale in California, and that if anyone associated with the franchisor or prospective franchisor offers a franchise for sale or solicits an offer to purchase a franchise in California, that action should be reported to the commissioner.
2. Requires the notification of intent to attend and display at a trade show in 1)a) above, to state, at a minimum, that it is unlawful for any person to offer or sell a franchise in California unless the offer of the franchise has been registered with the commissioner or is otherwise exempt under California law.
3. Requires a payment of a $225 fee to the DBO for each day the franchisor or prospective franchisor exhibits at the trade show.
4. Defines "franchise trade show" to mean an event in this state, displaying multiple franchise brands and open to multiple franchisors, that is advertised to, and invites, the general public to that event where franchisors who satisfy the reasonable criteria of the franchise trade show's organizer may secure a space from where they can inform the members of the general public in attendance about their existing and prospective products, services, or systems.
5. Authorizes the commissioner to summarily issue a stop order denying the effectiveness of an applicant's exemption application if the commissioner finds any of the following:
   1. The proposed business model is not lawful in California.
   2. A director, trustee, general partner, principal officer, or other executive who will have management responsibility of a franchisor or prospective franchisor, or an employee or representative who will be attending the franchise trade show on behalf of the franchisor or prospective franchisor, has been: i) convicted of or pleaded nolo contendere to any felony; ii) held liable in a civil action by final judgment of a court for fraud, embezzlement, or misappropriation of property; or iii) previously violated any franchise law of any state.
   3. The business would constitute a misrepresentation to, or deceit or fraud of, investors.
   4. The franchisor or prospective franchisor fails to meet the notification requirements described in 1) and 2) above.
6. Provides that appeal of the denial of the stop order described above is governed by procedures already specified by existing law, Corporations Code Section 31117
7. Establish a sunset date of January 1, 2022, for all of these provisions

The Senate amendments:

1. Require prospective franchisors to make additional disclosures, including the proposed information it intends to distribute, to the DBO commissioner as part of its notification of intent to attend and display at a trade show.
2. Require a payment of a $225 fee to the DBO for each day the franchisor or prospective franchisor exhibits at the trade show.
3. Authorize the DBO commissioner to issue a stop order denying a franchisor's exemption application for failure to meet specified criteria, and provides that appeal of the denial of this type of stop order is governed by procedures already specified by existing law.
4. Establish a sunset date of January 1, 2022 for all of these provisions.

FISCAL EFFECT: According to the Senate Appropriations Committee, this bill will result in unknown, moderate costs to DBO to create an application form for franchisors and prospective franchisors and unknown, but potentially significant costs to DBO to investigate any reported violations of the provisions of this bill.

COMMENTS: The California Franchise Investment Law (CFIL) generally prohibits a franchisor from selling a franchise in California unless prior to the sale the franchisor has, among other things: 1) registered with the DBO to sell franchises in California; 2) prepared a disclosure document containing certain information specified in the CFIL; and 3) provided the franchisee with a copy of the disclosure document at least 14 days before entering into any contract or receiving any payment from the franchisee. (Corporations Code Section 31110 et seq.) The DBO establishes regulations specifying the procedural and substantive requirements for registration.

According to the sponsor, the DBO considers a franchisor's exhibit at a trade show to be an illegal offer of a franchise, whether or not a sale occurs, if the franchisor has not first registered their offering with the DBO pursuant to the CFIL. As a result, the ability to exhibit a booth at a franchise trade show requires a company to comply with the full process for registering a franchise offer in California, even if the company does not yet plan to offer or sell franchises. This may occur because, for example, it is a foreign or out-of-state company seeking to measure interest in its franchise in California, or it is a young company in early development and not yet prepared to sell franchises.

According to the author, this bill is needed to remove barriers to potential new franchise investment in California, particularly by foreign companies or prospective franchisors not registered with DBO but simply seeking to participate in trade shows prior to any formal intent to offer franchises for sale. Proponents contend that trade shows are of great potential benefit to prospective franchisors because they could gain valuable insight from comments and suggestions made at trade shows by other franchisors and attendees. According to the sponsor, "there is no single event or forum other than trade shows where they can be exposed to this valuable information" and that this information "would allow the franchisor to make changes or adjustments to its program to produce a franchise that is more likely to be successful for both the franchisor and franchisees."

Supporters contend that the length of the registration process can discourage some franchisors from using trade shows to explore the potential for expansion into California. They state that "since franchisors have little control over, or visibility into, the length of the registration process, an exemption (from registration) would save some franchisors from missing trade shows that are often critical to their evaluation of growth potential or anticipated expansion into the California market."

Expanding opportunity for unregistered and prospective franchisors in California to exhibit at trade shows. This bill seeks to create an avenue for unregistered franchisors and prospective franchisors to operate an exhibition booth at a California trade show, while still maintaining consumer protections restricting the offer and sale of franchises. (As used hereafter, the term "unregistered franchisor" shall be considered to include prospective franchisors as well.) In light of the DBO's interpretation of the statute that an unregistered franchisor's exhibit at a trade show constitutes an impermissible offer to sell a franchise, this bill specifically provides that an offer to sell is not made merely because the unregistered franchisor has secured a space at a franchise trade show and offers information about its products, services, or system to the general public, as long as the party discloses certain information about its franchise concept, principal officers, and business addresses to the public and the DBO, as a specified.

First, the unregistered franchisor must notify the DBO of its intent to attend and display its concept at the trade show at least fourteen days before the show. Second, the unregistered franchisor must provide the DBO with additional documentation identifying its business, addresses, and principal officers, as specified. If the company already has a current franchise disclosure document not yet registered in California, then it must also provide a copy to the DBO with the above documentation. Finally, the unregistered franchisor must conspicuously post, in public view within its booth at the trade show, a specified notice cautioning attendees that it is not offering a franchise for sale in California, and that it is not legally able to offer a franchise for sale in California. This notice must also include, at a minimum, the DBO commissioner's contact information and a statement that if anyone associated with the franchisor offers a franchise for sale, or solicits an offer to purchase a franchise in California, that action should be reported to the commissioner. Together, these requirements are intended to increase the DBO's ability to maintain oversight and recordkeeping over unregistered companies exhibiting at franchise trade shows before they have officially registered as franchisors in California.

Notification to prospective franchisors of duty to register with DBO before a franchise may be offered or sold. Because companies allowed to exhibit at franchise trade shows under this bill may be either inexperienced in franchising or from another state or country, they may not yet be familiar with California franchise laws. In order to safeguard against possible violations of the CFIL by these actors, the bill requires the DBO-approved form used by an unregistered franchisor to indicate its intent to attend and exhibit at a trade show (see above) to also provide a reminder to the company of its duty to register with the DBO before it may legally offer or sell a franchise in this state. The bill preserves the discretion of DBO to determine the form and content of the overall notice, but does require this specific information to be included, at a minimum, in the final document approved by DBO.

Recent amendments require prospective franchisors to disclose additional identifying information to enable DBO oversight. According to proponents, many of the companies who stand to benefit from participating in trade shows under this bill are either young companies exploring whether to get into the business of selling franchises, or companies already franchised in another state or another country--in either case, unregistered as a franchisor in California and likely to be unknown to DBO. To safeguard against the possibility that members of the public may be victimized by unscrupulous trade show exhibitors who engage with prospective consumers, the author recently amended the bill to require any unregistered franchisor wishing to exhibit at a trade show to provide the commissioner of DBO with a document containing identifying information about the business and its officers. Specifically, this document, at a minimum, shall include: 1) the franchise concept brand name and a brief description of the potential franchise offering; 2) the name of the parent corporation or controlling entity, and the address where it is domiciled; 3) the names of the executive officers of the parent corporation or controlling entity; and 4) the address where the corporation or entity may be served legal process. Require prospective franchisors to make additional disclosures, including the proposed information it intends to distribute, to the DBO commissioner as part of its notification of intent to attend and display at a trade show. Disclosure of this information to DBO is intended to protect consumers and ensure that DBO has sufficient information about the unregistered franchisor for oversight purposes, including the ability to track down and further investigate the company if some problem is later reported as a result of its participation in the trade show.

In addition, the bill requires that any unregistered franchisor that already possesses a current franchise disclosure document to provide DBO with a copy of that disclosure document as a condition of being allowed to exhibit at a trade show. The Committee notes that, under Federal Trade Commission (FTC) rules, any company selling a franchise anywhere in the United States is already required to possess a FDD that they provide to prospective franchisees (16 Code of Federal Regulations Part 436.2). Therefore, this requirement will likely be a mere formality for existing out-of-state franchisors may enhance DBO oversight by providing relevant, detailed information about the franchise brand and the company itself. For companies without a FDD (for example, because they are still in the startup phase or because they are foreign-based), this requirement does not apply and poses no obstacle. It should be noted, though, that under the CFIL, a franchisor must ultimately complete the full registration process and submit the franchise disclosure document to DBO before it may offer or sell franchises in California in any case.

Additional amendments. Recent Senate amendments authorize the DBO commissioner to issue a stop order denying a franchisor's exemption application for failure to meet specified criteria, including, for example, that the proposed business model is not lawful in California, or that any corporate directors, officers, or employees or representatives who will be attending the franchise trade show on behalf of the franchisor or prospective franchisor have been 1) convicted of or pleaded nolo contendere to any felony; 2) held liable in a civil action by final judgment of a court for fraud, embezzlement, or misappropriation of property; or 3) previously violated any franchise law of any state. As amended the bill also authorizes an appeal of the denial of this type of stop order, which is to be governed by procedures pursuant to existing law, Section 31117 of the Corporations Code. Finally, recent Senate amendments require the prospective franchisor to pay a $225 fee to the DBO for each day the franchisor or prospective franchisor exhibits at the trade show, and establish a sunset date of January 1, 2022 such that all of these provisions will be in effect for five years before they are repealed of their own accord.

Analysis Prepared by: Anthony Lew / JUD. / (916) 319-2334 FN: 0004880

 THIRD READING 

Bill No: AB 1782

Author: Maienschein (R)

Amended: 8/19/16 in Senate

Vote: 21

SENATE BANKING & F.I. COMMITTEE: 7-0, 6/15/16

AYES: Glazer, Vidak, Galgiani, Hall, Hueso, Lara, Morrell

SENATE JUDICIARY COMMITTEE: 7-0, 6/28/16

AYES: Jackson, Moorlach, Anderson, Hertzberg, Leno, Monning, Wieckowski

SENATE APPROPRIATIONS COMMITTEE: 7-0, 8/11/16

AYES: Lara, Bates, Beall, Hill, McGuire, Mendoza, Nielsen

ASSEMBLY FLOOR: 76-0, 4/14/16 (Consent) - See last page for vote

SUBJECT: Franchises: offer to sell: trade show

SOURCE: Franchise Law Committee of the Business Law Section of the California State Bar

DIGEST:

This bill allows franchisors and prospective franchisors to display their concepts at franchise trade shows in California, without first having to register their offerings with the Department of Business Oversight (DBO), as specified.

Senate Floor Amendments of 8/19/16 add to the types of information that must be submitted to DBO before a franchisor or prospective franchisor may exhibit an unregistered franchise offering at a trade show; require the information to be submitted at least 30 days before the trade show; impose a fee of $225 per day, which franchisors must pay to the Commissioner of DBO each day they exhibit an unregistered offering at a trade show; clarify that DBO may issue a stop order denying the effectiveness of a franchisor’s trade show exemption, if DBO makes specified findings about the offering; and sunset the bill on January 1, 2022.

ANALYSIS:

Existing law:

1. Provides for the Franchise Investment Law (FIL; Corporations Code Section 31000 et seq.), administered by DBO.
   
2. Makes it unlawful for any person to offer or sell any franchise in this state unless the offer has been registered under the FIL or is exempt (Corporations Code Section 31110).
   
3. Requires franchisors subject to the FIL to register their offerings by submitting a disclosure document to DBO containing specified information about their businesses and the franchises they are offering, and providing a copy of that disclosure document, together with copies of all agreements pertaining to a prospective franchise sale, to a prospective franchisee at least 14 calendar days before entering into any contract with or receiving any payment from a prospective franchisee (Corporations Code Sections 31114 and 31119).
   
4. Contains several exemptions from the FIL (Corporations Code Sections 31100 through 31109.1). Some of the entities exempted from the FIL include franchisors with high net worth and significant experience conducting the businesses they are franchising (Corporations Code Sections 31101 and 31106) and franchisors who sell franchises exclusively to persons with high net worth and knowledge and experience in financial and business matters, as specified (Corporations Code Section 31109).

This bill, until January 1, 2022:

1. Defines a franchise trade show as an event in this state, displaying multiple franchise brands and open to multiple franchisors, that is advertised to, and invites the general public, and where franchisors who satisfy the reasonable criteria of the franchise trade show’s organizer may secure a space from which they can inform those in attendance about their existing and prospective products, services, or systems.
   
2. Provides that an offer to sell a franchise is not made, merely because a franchisor, or a franchisor who is not then offering a franchise for sale in California and has not registered a franchise offering under the provisions of the FIL, secures space at a franchise trade show, from which it offers information about its products, services, or system to the general public, as long as the franchisor or prospective franchisor does all of the following:
   
   1. Notifies the Commissioner of DBO (commissioner), in a form established by the commissioner, of its intent to attend and display its concept at a franchise trade show at least 30 days before the show. This notice must provide the commissioner with all of the following:
      
      1. Franchise concept brand name;
         
      2. Brief description of the potential franchise offering;
         
      3. Legal name and, if applicable, the name under which the franchisor or prospective franchisor does or intends to do business;
         
      4. Address where the franchisor or prospective franchisor is domiciled and the state (or country, if outside the United States) where it is organized;
         
      5. Names of the directors, trustees, general partners, principal officers, and other executives of the franchisor or prospective franchisor who will have management responsibility over the franchisor or prospective franchisor, and disclosure of whether any of these persons have been convicted of or pleaded nolo contender to any felony, been held liable in a civil action by final judgment of a court for fraud, embezzlement, or misappropriation of property, or has previously violated any franchise law of any state.
         
      6. Address at which the franchisor or prospective franchisor may be served legal process;
         
      7. Proposed written or electronic information that the franchisor or prospective franchisor intends to distribute or use at the trade show;
         
      8. Disclosure of whether any of the employees or representatives who will be attending the trade show on behalf of the franchisor or prospective franchisor has been convicted of or pleaded nolo contender to any felony, been held liable in a civil action by final judgment of a court for fraud, embezzlement, or misappropriation of property, or has previously violated any franchise law of any state;
         
      9. Copy of the franchise disclosure document, if applicable.
         
   2. Conspicuously posts, in public view within its franchise trade show booth, a notice, in a form established by the commissioner, which states the following, at a minimum: the franchisor or prospective franchisor is not offering a franchise for sale in California, and is not legally able to offer such a franchise for sale; if anyone associated with the franchisor or prospective franchisor offers a franchise for sale or solicits an offer to purchase a franchise in California, that action should be reported to the commissioner.
      
   3. Pays a fee of $225 per day to the commissioner for each day the franchisor or prospective franchisor exhibits at the trade show.
      
3. Provides that the commissioner may summarily issue a stop order denying the effectiveness of an applicant’s trade show exemption, if the commissioner finds any of the following:
   
   1. The proposed business model is not lawful in California.
      
   2. A director, trustee, general partner, principal officer, or other executive who will have management responsibility of a franchisor or prospective franchisor, or an employee or representative who will be attending the franchise trade show on behalf of the franchisor or prospective franchisor has been convicted of or pleaded nolo contender to any felony; been held liable in a civil action by final judgment of a court for fraud, embezzlement, or misappropriation of property; or has previously violated any franchise law of any state.
      
   3. The business would constitute a misrepresentation to or deceit or fraud of investors.
      
   4. The franchisor or prospective franchisor fails to submit required information to the commissioner.
      
4. Clarifies that persons issued a stop order are eligible to appeal that order pursuant to procedures specified in the Administrative Procedures Act.
   

Background

This bill is sponsored by the Franchise Law Committee of the Business Law Section of the California State Bar to help franchisors assess the viability of their franchise concepts by displaying at trade shows, without first having to register their offerings with DBO. Under existing law, DBO interprets the act of exhibiting at a franchise trade show in California as an offer to sell a franchise under the FIL, which requires the exhibiter to register its franchise offering with DBO or meet the requirements of a FIL exemption. This bill’s sponsor asserts that DBO’s interpretation of existing law creates a barrier for franchisors interested in assessing the public’s interest in their franchise concepts by exhibiting at trade shows in California, before undertaking what the sponsor asserts is a cumbersome and costly registration process. This bill amends the FIL to permit a franchisor that does not have a franchise registration or disclosure document on file with DBO to exhibit at a franchise trade show in California, for the limited purpose of determining whether there is sufficient interest in its franchise to warrant the time and expense of preparing a franchise disclosure document and registering its franchise offering.

Under the provisions of this bill, an unregistered franchisor will be able to exhibit at a franchise trade show, only if that franchisor provides the DBO with prior notice of its intent to participate in the trade show, posts a conspicuous notice at its trade show booth indicating that it does not have a currently registered disclosure document on file with DBO and is not offering franchises for sale in California, and provides people with instructions about how to file a complaint about an unregistered offering with DBO.

Comments

This bill is intended to alleviate a regulatory barrier that currently hampers franchisors attempting to test out new franchise concepts in California or test out California’s appetite for an existing franchise concept that is available elsewhere. This bill’s sponsor asserts that the time and expense of registering a franchise offering under the FIL may be wasted, if a franchisor discovers there is no interest in its franchise system or that it must make substantial changes to that system before it will be viable. This bill facilitates a franchisor’s ability to assess its concepts, before it prepares and files its registration and disclosure documents. This bill also addresses a problem that has been encountered by some franchisors, who have missed trade show registration deadlines while waiting for DBO to act on their registration applications, and in doing so have lost an opportunity to evaluate the viability of their franchise concepts in the state.

This bill’s sponsor asserts that providing franchisors with the ability to make adjustments to their franchise system, before selling franchises in California, not only benefits franchisors, but also benefits franchisees and vendors who sell to the franchisees. By facilitating a franchisor’s abilities to test the market in California, this bill will increase franchisees’ knowledge of the franchise opportunities that are or may potentially become available in California. Furthermore, by allowing more franchisors to display their offerings at trade shows, this bill has the potential to increase competition among franchisors for franchisees’ business.

Amendments made to the bill on August 19, 2016 reflect technical assistance provided by DBO.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Senate Appropriations Committee, this bill will result in unknown, moderate costs to DBO to create an application form for franchisors and prospective franchisors and unknown, but potentially significant costs to DBO to investigate any reported violations of the provisions of this bill.

SUPPORT: (Verified 8/11/16)

Franchise Law Committee of the Business Law Section of the California State Bar (source)

International Franchise Association

OPPOSITION: (Verified )

None received

ASSEMBLY FLOOR: 76-0, 4/14/16

AYES: Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Jones, Jones-Sawyer, Kim, Lackey, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Mullin, Obernolte, O'Donnell, Olsen, Patterson, Quirk, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Rendon

NO VOTE RECORDED: Irwin, Levine, Melendez, Nazarian

Prepared by: Eileen Newhall / B. & F.I. / (916) 651-4102

8/22/16 23:30:17

**** END ****

 THIRD READING  

Bill No: AB 1782

Author:

:

Vote:

SENATE BANKING & F.I. COMMITTEE: 7-0, 6/15/16

AYES: Glazer, Vidak, Galgiani, Hall, Hueso, Lara, Morrell

SENATE JUDICIARY COMMITTEE: 7-0, 6/28/16

AYES: Jackson, Moorlach, Anderson, Hertzberg, Leno, Monning, Wieckowski

SENATE APPROPRIATIONS COMMITTEE: 7-0, 8/11/16

AYES: Lara, Bates, Beall, Hill, McGuire, Mendoza, Nielsen

ASSEMBLY FLOOR: 76-0, 4/14/16 (Consent) - See last page for vote

SUBJECT:

SOURCE: Franchise Law Committee of the Business Law Section of the California State Bar

DIGEST: This bill allows franchisors to display their concepts at franchise trade shows in California, without first having to register their offerings with the Department of Business Oversight (DBO), as specified.

ANALYSIS:

Existing law:

1. Provides for the Franchise Investment Law (FIL; Corporations Code Section 31000 et seq.), administered by DBO.
   
2. Makes it unlawful for any person to offer or sell any franchise in this state unless the offer has been registered under the FIL or is exempt (Corporations Code Section 31110).
   
3. Requires franchisors subject to the FIL to register their offerings by submitting a disclosure document to DBO containing specified information about their businesses and the franchises they are offering, and providing a copy of that disclosure document, together with copies of all agreements pertaining to a prospective franchise sale, to a prospective franchisee at least 14 calendar days before entering into any contract with or receiving any payment from a prospective franchisee (Corporations Code Sections 31114 and 31119).
   
4. Contains several exemptions from the FIL (Corporations Code Sections 31100 through 31109.1). Some of the entities exempted from the FIL include franchisors with high net worth and significant experience conducting the businesses they are franchising (Corporations Code Sections 31101 and 31106) and franchisors who sell franchises exclusively to persons with high net worth and knowledge and experience in financial and business matters, as specified (Corporations Code Section 31109).

This bill:

1. Defines a franchise trade show as an event in this state, displaying multiple franchise brands and open to multiple franchisors, that is advertised to, and invites the general public, and where franchisors who satisfy the reasonable criteria of the franchise trade show’s organizer may secure a space from which they can inform those in attendance about their existing and prospective products, services, or systems.
   
2. Provides that an offer to sell a franchise is not made, merely because a franchisor or prospective franchisor, who has not registered an offering under the provisions of the FIL, offers information about its products, services, or system to the general public at a franchise trade show, as long as the franchisor complies with the requirements described immediately below.
   
3. Requires a franchisor or prospective franchisor to do all of the following in order to utilize the safe harbor from registration described immediately above:
   
   1. Notify the Commissioner of DBO (commissioner), in a form established by the commissioner, of its intent to attend and display its concept at a franchise trade show at least 14 days before the show. This notice must include all of the following, at a minimum: franchise concept brand name, brief description of the potential franchise offering, legal name and address of the franchisor or prospective franchisor, names of the principal officers of the franchisor or prospective franchisor, and address at which the franchisor or prospective franchisor may be served legal process.
      
   2. Conspicuously post, in public view within its franchise trade show booth, a notice, in a form established by the commissioner, which states the following, at a minimum: the franchisor or prospective franchisor is not offering a franchise for sale in California, and is not legally able to offer such a franchise for sale; if anyone associated with the franchisor or prospective franchisor offers a franchise for sale or solicits an offer to purchase a franchise in California, that action should be reported to the commissioner.
      

Background

This bill is sponsored by the Franchise Law Committee of the Business Law Section of the California State Bar to help franchisors assess the viability of their franchise concepts by displaying at trade shows, without first having to register their offerings with DBO. Under existing law, DBO interprets the act of exhibiting at a franchise trade show in California as an offer to sell a franchise under the FIL, which requires the exhibiter to register its franchise offering with DBO or meet the requirements of a FIL exemption. This bill’s sponsor asserts that DBO’s interpretation of existing law creates a barrier for franchisors interested in assessing the public’s interest in their franchise concepts by exhibiting at trade shows in California, before undertaking what the sponsor asserts is a cumbersome and costly registration process. This bill amends the FIL to permit a franchisor that does not have a franchise registration or disclosure document on file with DBO to exhibit at a franchise trade show in California, for the limited purpose of determining whether there is sufficient interest in its franchise to warrant the time and expense of preparing a franchise disclosure document and registering its franchise offering.

Under the provisions of this bill, an unregistered franchisor will be able to exhibit at a franchise trade show, only if that franchisor provides the DBO with prior notice of its intent to participate in the trade show, posts a conspicuous notice at its trade show booth indicating that it does not have a currently registered disclosure document on file with DBO and is not offering franchises for sale in California, and provides people with instructions about how to file a complaint about an unregistered offering with DBO.

Comments

This bill is intended to alleviate a regulatory barrier that currently hampers franchisors attempting to test out new franchise concepts in California or test out California’s appetite for an existing franchise concept that is available elsewhere. This bill’s sponsor asserts that the time and expense of registering a franchise offering under the FIL may be wasted, if a franchisor discovers there is no interest in its franchise system or that it must make substantial changes to that system before it will be viable. This bill facilitates a franchisor’s ability to assess its concepts, before it prepares and files its registration and disclosure documents. This bill also addresses a problem that has been encountered by some franchisors, who have missed trade show registration deadlines while waiting for DBO to act on their registration applications, and in doing so have lost an opportunity to evaluate the viability of their franchise concepts in the state.

This bill’s sponsor asserts that providing franchisors with the ability to make adjustments to their franchise system, before selling franchises in California, not only benefits franchisors, but also benefits franchisees and vendors who sell to the franchisees. By facilitating a franchisor’s abilities to test the market in California, this bill will increase franchisees’ knowledge of the franchise opportunities that are or may potentially become available in California. Furthermore, by allowing more franchisors to display their offerings at trade shows, this bill has the potential to increase competition among franchisors for franchisees’ business.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee, this bill will result in unknown, moderate costs to DBO to create an application form for franchisors and prospective franchisors and unknown, but potentially significant costs to DBO to investigate any reported violations of the provisions of this bill.

SUPPORT: (Verified 8/11/16)

Franchise Law Committee of the Business Law Section of the California State Bar (source)

International Franchise Association

OPPOSITION: (Verified 8/11/16)

None received

ASSEMBLY FLOOR: 76-0, 4/14/16

AYES: Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Jones, Jones-Sawyer, Kim, Lackey, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Mullin, Obernolte, O'Donnell, Olsen, Patterson, Quirk, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Rendon

NO VOTE RECORDED: Irwin, Levine, Melendez, Nazarian

Prepared by:

8/15/16 20:26:57

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

AB 1782 (Maienschein) - Franchises: offer to sell: trade show

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

AB 1782 would authorize the display of concepts at franchise trade shows in California, as specified, for franchisors that are not registered with the Department of Business Oversight (DBO) to sell franchises.

Fiscal Impact:

• Unknown moderate costs to DBO to create an application form for franchisors and prospective franchisors. (State Corporations Fund)
• Unknown, but potentially significant costs to DBO to investigate any reported violations. (State Corporations Fund)

Background:

The California Franchise Investment Law (CFIL) regulates franchise investment opportunities by subjecting various aspects of the franchise relationship to filing, review, and oversight by DBO. CFIL requires that a franchisor must register with DBO before an offer or sale of a franchise and provides that a willful violation of the law is a crime.

Under existing law, DBO regards non-registered franchisors exhibiting at trade shows as an offer to sell a franchise which would require the franchisor to register with DBO or meet the requirements for an exemption. According to the bill’s sponsor, this creates a potential barrier for franchisers who are interested in participating in trades shows to assess the public’s interest in their franchise concepts before undertaking the registration process.

Under existing law, an offer or sale of a franchise is made in California when an offer to sell is made in this state, or an offer to buy is accepted in this state, or, if the franchisee is domiciled in this state, the franchised business is or will be operated in this state. Additionally, an offer to sell is made in this state when the offer either originates from this state or is directed by the offeror to this state and received at the place to which it is directed, or when acceptance is communicated to the offeror in this state.

Under existing law, an offer is not made in this state merely because (1) the publisher circulates or there is circulated on his behalf in this state any bona fide newspaper or other publication of general, regular, and paid circulation which has had more than two-thirds of its circulation outside this state during the past 12 months, or (2) a radio or television program originating outside this state is received in this state. This bill would specify that an offer to sell is also not made in this state merely because a franchisor or prospective franchisor secures a space at a franchise trade show from which it offers information about it products or services to the general public.

According to the International Franchise Association, franchising accounts for over 925,000 jobs across more than 82,700 franchise establishments in California and franchising in California contributes to over $94 billion in economic activity each year.

Proposed Law:

This bill would define a “franchise trade show,” and would provide that an offer to sell is not made in this state merely because a franchisor, or a franchisor who is not then offering a franchise for sale in California and has not registered an offering under the provisions of the Franchise Investment Law (FIL), secures a space at a franchise trade show from which it offers information about its products, services, or system to the general public, as long as the franchisor or prospective franchisor does the following:

• Notifies the commissioner, in a form established by the commissioner, of its intent to attend and display its concept at the franchise trade show at least 14 days before the show. Notification must include a document, the franchise concept brand name and a brief description of the potential franchise offering, the legal name of the franchisor or prospective franchisor, and the address where it is domiciled, the names of the principal officers of the franchisor or prospective franchisor, and the address where the franchisor or prospective franchisor may be served legal process.
• Conspicuously posts in public view within its franchise trade show booth a notice, in a form established by the commissioner, that states that the franchisor or prospective franchisor is not offering or legally able to offer a franchise for sale in California, that if anyone associated with the franchisor or prospective franchisor offers a franchise for sale or solicits an offer to purchase a franchise in California, that action should be reported to the commissioner, and the contact information of the commissioner.

Staff Comments:

The provisions of this bill have the potential to create a new category of fraud and abuse at franchise trade shows that would be investigated and enforced by DBO. DBO would be able to enforce any violations under Section 31400 of the Corporations Code which states that “whenever it appears to the commissioner that any person has engaged or is about to engage in any act or practice constituting a violation of any provision of this law or any rule or order hereunder, the commissioner may in the commissioner’s discretion bring an action, or the commissioner may request the Attorney General to bring an action in the name of the people of the State of California, in the superior court to enjoin the acts or practices or to enforce compliance with this law or any rule or order hereunder. Upon a proper showing a permanent or preliminary injunction, restraining order or writ of mandate shall be granted and a receiver or conservator may be appointed for the defendant or the defendant’s assets.” As such, DBO would be able to investigate violations to the extent that they are aware of violations. DBO currently has an Enforcement Division that takes enforcement actions and orders issued by the commissioner.

-- END --

SENATE JUDICIARY COMMITTEE

Senator Hannah-Beth Jackson, Chair

2015-2016 Regular Session

Bill No: AB 1782 (Author:Maienschein)

Version: March 10, 2016

Hearing Date: June 28, 2016

Fiscal: Yes

Urgency: No

Consultant: RD

SUBJECT

Franchises: offer to sell: trade show

DESCRIPTION

This bill would provide that an offer to sell is not made in this state for purposes of the California Franchise Investment Law (CFIL) merely because a franchisor, or a franchisor who is not then offering a franchise for sale in California and has not registered an offering under the CFIL, as specified, secures a space at a franchise trade show from which it offers information about its products, services, or system to the general public, if the franchisor or prospective franchisor complies with certain requirements. This bill would define “franchise trade show” to mean an event in this state, displaying multiple franchise brands and open to multiple franchisors, that is advertised to, and invites, the general public to that event where franchisors who satisfy the reasonable criteria of the franchise trade show’s organizer may secure a space from where they can inform the members of the general public in attendance about their existing and prospective products, services, or systems.

BACKGROUND

The California Franchise Investment Law (CFIL) was enacted in 1970 to regulate franchise investment opportunities in order to protect California investors from flimsy or fraudulent franchise investments. The CFIL generally requires franchisors to provide prospective franchisees with the information necessary to make an intelligent decision regarding franchise offers, and prohibits the sale of franchises where they would lead to fraud or likelihood that a franchisor’s promises would not be fulfilled. (Corp. Code Sec. 31000 et seq.)

This bill would allow franchisors to display their concepts at franchise trade shows, as defined, in California, without first having to register their offerings with the Department of Business Oversight, as specified.

This bill was heard in the Senate Banking & Financial Institutions Committee on June 15, 2016, and passed out on a vote of 7-0.

CHANGES TO EXISTING LAW

Existing law, the California Franchise Investment Law (CFIL), generally requires any offers and sales of franchises in California to be registered with the Department of Business Oversight (DBO), unless it otherwise qualifies for an exemption, as specified. (Corp. Code Sec. 31000 et seq.; Corp. Code Sec. 31110.)

Existing law, the CFIL, generally defines a franchise as a contract or agreement, either expressed or implied, whether oral or written, between two or more persons, by which all of the following occur:

• a franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor;
• the operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and
• the franchisee is required to pay, directly or indirectly, a franchise fee. (Corp. Code Sec. 31005(a).)

Existing law requires franchisors subject to the CFIL to register their offerings by submitting an application accompanied by a proposed franchise disclosure document to DBO containing specified material information about their businesses and the franchises they are offering. Existing law requires franchisors to provide a copy of that disclosure document, together with copies of all proposed agreements pertaining to the sale of the franchise, to a prospective franchisee at least 14 calendar days before entering into any contract with or receiving any payment from a prospective franchisee (whichever occurs first). (Corp. Code Secs. 31114, 31119.)

Existing law contains several exemptions from the CFIL. (See Corp. Code Secs. 31100-31109.1). For example, some of the entities exempted from the CFIL include franchisors with high net worth and significant experience conducting the businesses they are franchising and franchisors who sell franchises exclusively to persons with high net worth and knowledge and experience in financial and business matters, as specified. (See Corp. Code Secs. 31101, 31106, 31109.) The franchisor must, among other things, file with the commissioner a notice of exemption and pay a fee, as specified.

Existing law provides that an offer or sale of a franchise is made in this state when an offer to sell is made in this state, or an offer to buy is accepted in this state, or, if the franchisee is domiciled in this state, the franchised business is or will be operated in this state. Existing law further provides that an offer to sell is made in this state when the offer either originates from this state or is directed by the offeror to this state and received at the place to which it is directed. An offer to sell is accepted in this state when acceptance is communicated to the offeror in this state; and acceptance is communicated to the offeror in this state when the offeree directs it to the offeror in this state reasonably believing the offeror to be in this state and it is received at the place to which it is directed. (Corp. Code Sec. 31013(a), (b).)

Existing law specifies that an offer to sell is not made in this state merely because:

(1) the publisher circulates, or there is circulated on his behalf, in this state any bona fide newspaper or other publication of general, regular, and paid circulation which has had more than two-thirds of its circulation outside this state during the past 12 months; or (2) a radio or television program originating outside this state is received in this state. (Corp. Code Sec. 31013(c).)

This bill would add that an offer to sell is not made in this state merely because a franchisor, or a franchisor who is not then offering a franchise for sale in California and has not registered an offering, as required by the CFIL, secures a space at a franchise trade show from which it offers information about its products, services, or system to the general public if the franchisor or prospective franchisor does all of the following:

• Notifies the commissioner, in a form established by the commissioner, of its intent to attend and display its concept at the franchise trade show at least 14 days before the show, accompanied by the following:
• a document, in a form approved by the commissioner, that includes, at a minimum: the franchise concept brand name and a brief description of the potential franchise offering; the legal name of the franchisor or prospective franchisor, and the address where it is domiciled; the names of the principal officers of the franchisor or prospective franchisor; and the address where the franchisor or prospective franchisor may be served legal process; and
• if the franchisor or prospective franchisor already possesses a current franchise disclosure document not yet registered in California, a copy of the franchise disclosure document.
• Conspicuously posts in public view within its franchise trade show booth a notice, in a form established by the commissioner, that states, at a minimum, all of the following:
• the franchisor or prospective franchisor is not offering a franchise for sale in California;
• the franchisor or prospective franchisor is not legally able to offer a franchise for sale in California;
• if anyone associated with the franchisor or prospective franchisor offers a franchise for sale or solicits an offer to purchase a franchise in California, that action should be reported to the commissioner; and
• the contact information of the commissioner.

This bill would require that the form described, above, be in the form and content prescribed by the commissioner, but, at a minimum, state that it is unlawful for any person to offer or sell a franchise in California unless the offer of the franchise has been registered with the commissioner or is otherwise exempt.

This bill would define “franchise trade show” to mean an event in this state, displaying multiple franchise brands and open to multiple franchisors, that is advertised to, and invites, the general public to that event where franchisors who satisfy the reasonable criteria of the franchise trade show’s organizer may secure a space from where they can inform the members of the general public in attendance about their existing and prospective products, services, or systems.

COMMENT

1. Stated need for the bill

According to the author:

The California Franchise Investment Law (CFIL) generally requires a franchisor to register with the Department of Business Oversight (DBO) before an offer or sale of a franchise and provides that a willful violation of the law is a crime. [ . . . ] Currently, the DBO views non-registered franchisors exhibiting at trade shows as an “offer’ to sell a franchise under the CFIL, which is prohibited unless the franchisor has first registered the franchise offering or has satisfied an exemption from registration. This creates a potential barrier for franchisors interested in assessing the public’s interest in their franchise concepts by participating in trade shows in California before undertaking the cumbersome and costly registration process. This discourages rather than encourages new franchise investment in California and limits the public’s exposure to potential business opportunities that may become available in California if there is interest.

AB 1782 would amend the CFIL to permit a franchisor who does not have a currently effective franchise registration and/or a disclosure document to display at a franchise trade show for the limited purpose of determining whether there is sufficient interest in its franchise to warrant the time and expense of preparing a franchise disclosure document and pursuing a California registration. Such participation would be conditioned on the franchisor giving the DBO prior notice of its intent to participate at the trade show, and posting a conspicuous notice that it does not have a currently registered disclosure document and that it is not offering franchises for sale in California at this time.

The International Franchise Association writes in support that, “for many years the West Coast Franchise Expo had been held in California. However, as a result of current law, the Expo elected to move to Denver, Colorado. Passage of AB 1782 will put California in a better position to retain and attract not only trade shows like the West Coast Franchise Expo and others, but will also lead to greater exposure of entrepreneurial opportunities to California residents. In California alone, franchising accounts for over 925,000 jobs across more than 82,700 franchise establishments contributing over $94 billion in economic activity each year. AB 1782 will encourage franchise growth in California and lead to more small business owners who will in turn provide more jobs and revenue to California.”

2. Bill would authorize unregistered franchisors to exhibit at franchise trade shows

As noted in the Background, the offer and sale of private franchises in California is governed, in large part, by the Franchise Investment Law (Corp. Code Sec. 31000 et seq.; hereinafter CFIL) which set forth registration and disclosure requirements with which prospective franchisors must comply. In enacting the CFIL, the Legislature declared its intent to provide each prospective franchisee with the information necessary to make an intelligent decision regarding franchises being offered, to prohibit the sale of franchises where such sale would lead to fraud or a likelihood that the franchisor’s promises would not be fulfilled, and to protect the franchisor and franchisee by providing a better understanding of the relationship between the franchisor and the franchisee regarding their business relationship. (Corp. Code Sec. 31001.)  Even though it is clear that courts are required to construe the CFIL broadly to carry out legislative intent, that intent is to protect franchise investors, that is, those who pay for the right to enter into a business. (34A Cal Jur Franchises from Private Parties Sec. 15.) Franchisors and prospective franchisors seeking to offer or sell franchises in this state generally must register their franchise or prospective franchise with the Department of Business Oversight (DBO), unless otherwise subject to an exemption under the CFIL. Even then, the franchise must, among other things, file with the commissioner a notice of exemption and pay a fee, as specified. (See e.g. Corp. Code Secs. 31101, 31106, 31109.)

Under the CFIL, an offer or sale of a franchise is made in this state when an offer to sell is made in this state, or an offer to buy is accepted in this state, or, if the franchisee is domiciled in this state, the franchised business is or will be operated in this state. Existing law further provides, in relevant part, that an offer to sell is made in this state when the offer either originates from this state or is directed by the offeror to this state and received at the place to which it is directed. (Corp. Code Sec. 31013(a), (b).)

At the same time, the CFIL specifies that an offer to sell is not made in this state merely because: (1) the publisher circulates or there is circulated on his behalf in this state any bona fide newspaper or other publication of general, regular, and paid circulation which has had more than two-thirds of its circulation outside this state during the past 12 months; or (2) a radio or television program originating outside this state is received in this state. (Corp. Code Sec. 31013.)

This bill would now specify that an offer to sell is also not made in this state merely because a franchisor, or a franchisor who is not then offering a franchise for sale in California and has not registered an offering, as required under specified law, secures a space at a franchise trade show from which it offers information about its products, services, or system to the general public, so long as the franchisor or prospective franchisor takes certain steps, including notifying the DBO commissioner, and conspicuously posting in public view within its franchise trade show booth a specified notice. First, to fall under this “safe harbor,” the franchisor or prospective franchisor (who is unregistered with the DBO), must notify the commissioner, in a specified form established by the commissioner, of its intent to attend and display its concept at the franchise trade show at least 14 days before the show. That notice must be accompanied by both: (1) a document, in a form approved by the commissioner, that includes, at a minimum: the franchise concept brand name and a brief description of the potential franchise offering; the legal name of the franchisor or prospective franchisor, and the address where it is domiciled; the names of the principal officers of the franchisor or prospective franchisor; and the address where the franchisor or prospective franchisor may be served legal process; and (2) a copy of the franchise disclosure document if the franchisor or prospective franchisor already possesses a current franchise disclosure document not yet registered in California.

Second, the franchisor or prospective franchisor must conspicuously post in public view within its franchise trade show booth a notice that states at a minimum, and in a form established by the commissioner, all of the following:

• the franchisor or prospective franchisor is not offering a franchise for sale in California;
• the franchisor or prospective franchisor is not legally able to offer a franchise for sale in California;
• if anyone associated with the franchisor or prospective franchisor offers a franchise for sale or solicits an offer to purchase a franchise in California, that action should be reported to the commissioner; and
• the contact information of the commissioner.

Presumably, any franchisor or prospective franchisor that violates these provisions could face action by DBO, assuming that they provided information to DBO as required by this bill so that DBO could locate them, and assuming that DBO would have presence at these trade shows to enforce the provision. The sponsor of this bill, Franchise Law Committee of the State Bar’s Business Law Section, has relayed to Committee staff that DBO would be able to enforce any violations under Section 31400 of the Corporations Code, “[w]henever it appears to the commissioner that any person has engaged or is about to engage in any act or practice constituting a violation of any provision of this law or any rule or order hereunder, the commissioner may in the commissioner’s discretion bring an action, or the commissioner may request the Attorney General to bring an action in the name of the people of the State of California, in the superior court to enjoin the acts or practices or to enforce compliance with this law or any rule or order hereunder. Upon a proper showing a permanent or preliminary injunction, restraining order or writ of mandate shall be granted and a receiver or conservator may be appointed for the defendant or the defendant's assets.” (Corp. Code Sec. 31400(a).) Furthermore, the sponsor notes, Section 31400(b) of the Corporations Code provides that “[i]f the commissioner determines it is in the public interest, the commissioner may include in any action authorized by subdivision (a) a claim for ancillary relief, including, but not limited to, a claim for restitution or disgorgement or damages on behalf of the persons injured by the act or practice constituting the subject matter of the action, and the court shall have jurisdiction to award that additional relief.” Therefore, it appears clear that DBO would be able to bring an action for violations of the trade show exemption under this bill’s proposed addition to the CFIL to the extent that they are aware of violations.

The sponsor contends that the bill will benefit not only franchisors and prospective franchisors, but also prospective franchisees:

[T]he exemption [from registration] will enhance prospective franchisee knowledge of the potential types of franchises that may, at some point, be available within California for the particular market. The exemption will also drive competition between franchise systems, including those already registered in California, to improve products and innovate their systems to the benefit of current franchisees and consumers. In addition, the exemption will drive competition between franchisors to attract new franchisees, thereby potentially enhancing the terms extended to potential franchisees.

Support: International Franchise Association

Opposition: None Known

HISTORY

Source: Franchise Law Committee of the Business Law Section of the State Bar

Related Pending Legislation: None Known

Prior Legislation: None Known

Prior Vote:

Senate Banking and Financial Institutions Committee (Ayes 7, Noes 0)

Assembly Floor (Ayes 76, Noes 0)

Assembly Appropriations Committee (Ayes 18, Noes 0)

Assembly Judiciary Committee (Ayes 8, Noes 0)

**************

SENATE COMMITTEE ON

BANKING AND FINANCIAL INSTITUTIONS

Senator Steven Glazer, Chair

2015 - 2016 Regular

Bill No: Hearing Date: June 15, 2016

Subject:

SUMMARY

Allows franchisors to display their concepts at franchise trade shows in California, without first having to register their offerings with the Department of Business Oversight (DBO), as specified.

DESCRIPTION

1. Defines a franchise trade show as an event in this state, displaying multiple franchise brands and open to multiple franchisors, that is advertised to, and invites the general public, and where franchisors who satisfy the reasonable criteria of the franchise trade show’s organizer may secure a space from which they can inform those in attendance about their existing and prospective products, services, or systems.
   
2. Provides that an offer to sell a franchise is not made, merely because a franchisor or prospective franchisor, who has not registered an offering under the provisions of the Franchise Investment Law, offers information about its products, services, or system to the general public at a franchise trade show, as long as the franchisor complies with the requirements described immediately below.
   
3. Requires a franchisor or prospective franchisor to do all of the following in order to utilize the safe harbor from registration described immediately above:
   
   1. Notify the Commissioner of Business Oversight (commissioner), in a form established by the commissioner, of its intent to attend and display its concept at a franchise trade show at least 14 days before the show. This notice must include all of the following, at a minimum: franchise concept brand name, brief description of the potential franchise offering, legal name and address of the franchisor or prospective franchisor, names of the principal officers of the franchisor or prospective franchisor, and address at which the franchisor or prospective franchisor may be served legal process.
      
   2. Conspicuously post, in public view within its franchise trade show booth, a notice, in a form established by the commissioner, which states the following, at a minimum: the franchisor or prospective franchisor is not offering a franchise for sale in California, and is not legally able to offer such a franchise for sale; if anyone associated with the franchisor or prospective franchisor offers a franchise for sale or solicits an offer to purchase a franchise in California, that action should be reported to the commissioner.
      

EXISTING LAW

1. Provides for the Franchise Investment Law (FIL; Corporations Code Section 31000 et seq.), administered by DBO.
   
2. Defines a franchise, pursuant to the FIL, as a contract or agreement, either expressed or implied, whether oral or written, between two or more persons, by which all of the following occur (Corporations Code Section 31005):
   
   1. A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor;
      
   2. The operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate;
      
   3. The franchisee is required to pay, directly or indirectly, a franchise fee.
      
3. Makes it unlawful for any person to offer or sell any franchise in this state unless the offer has been registered under the FIL or is exempt (Corporations Code Section 31110).
   
4. Requires franchisors subject to the FIL to register their offerings by submitting a disclosure document to DBO containing specified information about their businesses and the franchises they are offering, and providing a copy of that disclosure document, together with copies of all agreements pertaining to a prospective franchise sale, to a prospective franchisee at least 14 calendar days before entering into any contract with or receiving any payment from a prospective franchisee (Corporations Code Sections 31114 and 31119).
   
5. Contains several exemptions from the FIL (Corporations Code Sections 31100 through 31109.1). Some of the entities exempted from the FIL include franchisors with high net worth and significant experience conducting the businesses they are franchising (Corporations Code Sections 31101 and 31106) and franchisors who sell franchises exclusively to persons with high net worth and knowledge and experience in financial and business matters, as specified (Corporations Code Section 31109).

COMMENTS

1. Purpose: This bill is sponsored by the Franchise Law Committee of the Business Law Section of the California State Bar to help franchisors assess the viability of their franchise concepts by displaying at trade shows, without first having to register their offerings with DBO.
   
2. Background: Under existing law, DBO interprets the act of exhibiting at a franchise trade show in California as an offer to sell a franchise under the FIL, which requires the exhibiter to register its franchise offering with DBO or meet the requirements of a FIL exemption. This bill’s sponsor asserts that DBO’s interpretation of existing law creates a barrier for franchisors interested in assessing the public’s interest in their franchise concepts by exhibiting at trade shows in California, before undertaking what the sponsor asserts is a cumbersome and costly registration process. This bill amends the FIL to permit a franchisor that does not have a franchise registration or disclosure document on file with DBO to exhibit at a franchise trade show in California, for the limited purpose of determining whether there is sufficient interest in its franchise to warrant the time and expense of preparing a franchise disclosure document and registering its franchise offering.
   
   Under the provisions of this bill, an unregistered franchisor will be able to exhibit at a franchise trade show, only if that franchisor provides the DBO with prior notice of its intent to participate in the trade show, posts a conspicuous notice at its trade show booth indicating that it does not have a currently registered disclosure document on file with DBO and is not offering franchises for sale in California, and provides people with instructions about how to file a complaint about an unregistered offering with DBO.
   
3. Discussion: This bill is intended to alleviate a regulatory barrier that currently hampers franchisors attempting to test out new franchise concepts in California or test out California’s appetite for an existing franchise concept that is available elsewhere. This bill’s sponsor asserts that the time and expense of registering a franchise offering under the FIL may be wasted, if a franchisor discovers there is no interest in its franchise system or that it must make substantial changes to that system before it will be viable. This bill facilitates a franchisor’s ability to assess its concepts, before it prepares and files its registration and disclosure documents. This bill also addresses a problem that has been encountered by some franchisors, who have missed trade show registration deadlines while waiting for DBO to act on their registration applications, and in doing so have lost an opportunity to evaluate the viability of their franchise concepts in the state.
   
   This bill’s sponsor asserts that providing franchisors with the ability to make adjustments to their franchise system, before selling franchises in California, not only benefits franchisors, but also benefits franchisees and vendors who sell to the franchisees. By facilitating a franchisor’s abilities to test the market in California, the bill will increase franchisees’ knowledge of the franchise opportunities that are or may potentially become available in California. Furthermore, by allowing more franchisors to display their offerings at trade shows, this bill has the potential to increase competition among franchisors for franchisees’ business.
   
4. Summary of Arguments in Support:
   
   1. The Franchise Law Committee of the Business Law Section of the California State Bar is sponsoring this bill for the reasons stated above.
      
   2. The International Franchise Association writes, “For many years the West Coast Franchise Expo had been held in California. However, as a result of current law, the Expo elected to move to Denver, Colorado. Passage of AB 1782 will put California in a better position to retain and attract not only trade shows like the West Coast Franchise Expo and others, but will also lead to greater exposure of entrepreneurial opportunities to California residents. In California alone, franchising accounts for over 925,000 jobs across more than 82,700 franchise establishments contributing over $94 billion in economic activity each year. AB 1782 will encourage franchise growth in California and lead to more small business owners who will in turn provide more jobs and revenue to California.”
      
5. Summary of Arguments in Opposition: None received.
   

LIST OF REGISTERED SUPPORT/OPPOSITION

Support

Franchise Law Committee of the Business Law Section of the California State Bar (sponsor)

International Franchise Association

Opposition

None received

-- END --

Date of Hearing: April 6, 2016

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 1782

Author:(Maienschein) – As Amended Ver:March 10, 2016

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill authorizes a company that has not registered with the Department of Business Oversight (DBO) to sell franchises to nevertheless exhibit at a franchise trade show in California, as long as the company complies with the following:

1. Notifies the DBO commissioner of its intent to attend and display at least 14 days prior to the trade show, by submitting a form established by the commissioner and containing specified information about the company.
2. Post in public view at the trade show a notice that the company is not offering and is not legally able to offer a franchise for sale in California.

FISCAL EFFECT:

Minor absorbable costs to the DBO.

COMMENTS:

Background and Purpose. The California Franchise Investment Law (CFIL) generally prohibits the sale of a franchise in California unless prior to the sale the franchisor has, among other things, prepared a franchise disclosure document (FDD) and registered with the Commissioner of the DBO to sell franchises in California. The DBO considers a franchisor's exhibit at a trade show to be an illegal offer of a franchise, whether or not a sale occurs, if the franchisor has not first registered their offering with the DBO pursuant to the CFIL. The ability to exhibit a booth at a franchise trade show thus requires a prospective franchisor to comply with the full CFIL process for registering a franchise--even if the company does not yet plan to offer or sell franchises in California. The author contends that because of the cost and complexity of the registration process, this requirement unnecessarily discourages some potential franchisors, particularly foreign or out-of-state franchise companies or young startup companies seeking to measure interest in their brands or concepts, from using trade shows to explore the potential for expansion into California.

This bill, sponsored by the Business Law Section of the State Bar, authorizes prospective franchisees that have not registered with the DBO to nevertheless exhibit at franchise trade shows in California, as long as specified disclosures are made to the DBO and to trade show attendees.

Analysis Prepared by: Chuck Nicol / APPR. / (916) 319-2081

Date of Hearing: March 15, 2016

ASSEMBLY COMMITTEE ON JUDICIARY

Mark Stone, Chair

ABPCA Bill Id:AB 1782

Author:(Maienschein) – As Amended Ver:March 10, 2016

PROPOSED CONSENT

SUBJECT: FRANCHISES: OFFER TO SELL: TRADE SHOWS

KEY ISSUE: IN order to encourage potential new franchise investment in california, should prospective franchisors (companies not yet registered as franchisorS with the department of business oversight) be permitted to operate exhibit booths at franchise trade shows if, for consumer protection, they provide specified disclosures to the department and show attendees?

SYNOPSIS

Existing law, the California Franchise Investment Law (CFIL), generally prohibits the sale of a franchise in California unless prior to the sale the franchisor has, among other things, prepared a franchise disclosure document (FDD) and registered with the Commissioner of the Department of Business Oversight (DBO) to sell franchises in California. Currently, the DBO considers a franchisor's exhibit at a trade show to be an illegal offer of a franchise, whether or not a sale occurs, if the franchisor has not first registered their offering with the DBO pursuant to the CFIL. As a result, the ability to exhibit a booth at a franchise trade show requires a prospective franchisor to comply with the full CFIL process for registering a franchise--even if the company does not yet plan to offer or sell franchises in California. The author contends that because of the cost and complexity of the registration process, this rule unnecessarily discourages some potential franchisors, particularly foreign or out-of-state franchise companies and young startup companies seeking to measure interest in their brands or concepts, from using trade shows to explore the potential for expansion into California.

This bill, sponsored by the Business Law Section of the State Bar, would authorize prospective franchisees that have not registered with the DBO to nevertheless exhibit at franchise trade shows in California as long as specified disclosures are made to the DBO and to trade show attendees. Under this bill, the prospective franchisee would be required to notify the DBO of its intent to exhibit at the show at least fourteen days in advance, and, accompanying this notice, would have to provide a document describing the potential franchise offering and identifying the legal name of the company, its principal officers and business addresses. If the company already possesses a current FDD not yet registered in California, then it must also submit a copy of the FDD to the DBO with the other documentation. Finally, the prospective franchisor would be required to conspicuously post, in public view at its trade show booth, a notice to the public that it is not offering a franchise for sale in California and is not legally able to offer a franchise for sale in California, among other things. Importantly, the bill does not relax or otherwise change the underlying FDD and registration requirements to legally offer or sell franchises in California; in fact, the bill requires DBO to provide additional notice of these registration requirements to prospective franchisors who express intent to exhibit at a trade show. There is no known opposition to this bill.

SUMMARY: Authorizes companies that have not registered with the DBO to sell franchises in California to exhibit at a franchise trade show as long as specified disclosures are made to the DBO and to trade show attendees. Specifically, this bill:

1. Provides that an offer to sell is not made in this state merely because a prospective franchisor, or a franchisor who is not then offering a franchise for sale in California and has not registered an offering under state law, secures a space at a franchise trade show from which it offers information about its products, services, or system to the general public if the franchisor or prospective franchisor does all of the following:
   1. Notifies the commissioner of its intent to attend and display its concept at the franchise trade show at least fourteen days before the show, in a form established by the commissioner.
   2. Accompanying the above notification, provides the commissioner with: (1) a document that, at a minimum, describes the potential franchise offering and identifies the legal name of the company, its principal officers and business addresses; and (2) a copy of the franchise disclosure document (FDD), if it already possesses a current FDD not yet registered in California.
   3. Conspicuously posts in public view within its franchise trade show booth a notice, in a form established by the commissioner, that states, at a minimum, that the franchisor or prospective franchisor is not offering a franchise for sale in California, is not legally able to offer a franchise for sale in California, and that if anyone associated with the franchisor or prospective franchisor offers a franchise for sale or solicits an offer to purchase a franchise in California, that action should be reported to the commissioner.
2. Requires the notification of intent to attend and display at a trade show (#1a), above) to state, at a minimum, that it is unlawful for any person to offer or sell a franchise in California unless the offer of the franchise has been registered with the commissioner or is otherwise exempt under California law.
3. Defines "franchise trade show” to mean an event in this state, displaying multiple franchise brands and open to multiple franchisors, that is advertised to, and invites, the general public to that event where franchisors who satisfy the reasonable criteria of the franchise trade show’s organizer may secure a space from where they can inform the members of the general public in attendance about their existing and prospective products, services, or systems.

EXISTING LAW:

1. Provides that an offer or sale of a franchise is made in this state when an offer to sell is made in this state, or an offer to buy is accepted in this state, or, if the franchisee is domiciled in this state, the franchised business is or will be operated in this state. (Corporations Code 31013 (a). All further references are to this code unless otherwise stated.)
2. Provides that an offer to sell is made in this state when the offer either originates from this state or is directed by the offeror to this state and received at the place to which it is directed. Further provides that an offer to sell is accepted in this state when acceptance is communicated to the offeror in this state; and acceptance is communicated to the offeror in this state when the offeree directs it to the offeror in this state reasonably believing the offeror to be in this state and it is received at the place to which it is directed. (Section 31013 (b).)
3. Clarifies that an offer to sell is not made in this state merely because: a) the publisher circulates or there is circulated on his or her behalf in this state any bona fide newspaper or other publication of general, regular, and paid circulation which has had more than two-thirds of its circulation outside this state during the past 12 months, or b) a radio or television program originating outside this state is received in this state. (Section 31013 (c).)
4. Makes it unlawful for any person to offer or sell any franchise in this state unless the offer of the franchise has been registered with the Commissioner (commissioner) of the Department of Business Oversight (DBO), or qualifies under one of several specified exemptions. (Section 31110.)
5. Requires an application for registration to be accompanied by a proposed franchise disclosure document (FDD), which shall contain the material information set forth in the application for registration, as specified by rule of the commissioner, and such additional disclosures as the commissioner may require. (Section 31114.)
6. Makes it unlawful to sell any franchise in this state that is subject to registration without first providing to the prospective franchisee, at least 14 days prior to the execution by the prospective franchisee of any binding franchise or other agreement, or at least 14 days prior to the receipt of any consideration, whichever occurs first, a copy of the franchise disclosure document, together with a copy of all proposed agreements relating to the sale of the franchise. (Section 31119 (a).)

FISCAL EFFECT: As currently in print this bill is keyed fiscal.

COMMENTS: The California Franchise Investment Law (CFIL) generally prohibits a franchisor from selling a franchise in California unless prior to the sale the franchisor has, among other things: 1) registered with the DBO to sell franchises in California; 2) prepared a disclosure document containing certain information specified in the CFIL; and 3) provided the franchisee with a copy of the disclosure document at least 14 days before entering into any contract or receiving any payment from the franchisee. (Corporations Code Section 31110 et seq.) The DBO establishes regulations specifying the procedural and substantive requirements for registration.

According to the sponsor, the DBO considers a franchisor's exhibit at a trade show to be an illegal offer of a franchise, whether or not a sale occurs, if the franchisor has not first registered their offering with the DBO pursuant to the CFIL. As a result, the ability to exhibit a booth at a franchise trade show requires a company to comply with the full process for registering a franchise offer in California, even if the company does not yet plan to offer or sell franchises. This may occur because, for example, it is a foreign or out-of-state company seeking to measure interest in its franchise in California, or it is a young company in early development and not yet prepared to sell franchises.

Proponents contend that trade shows are of great potential benefit to prospective franchisors because they could gain valuable insight from comments and suggestions made at trade shows by other franchisors and attendees. According to the sponsor, "there is no single event or forum other than trade shows where they can be exposed to this valuable information" and that this information "would allow the franchisor to make changes or adjustments to its program to produce a franchise that is more likely to be successful for both the franchisor and franchisees."

Supporters contend that the length of the registration process can discourage some franchisors from using trade shows to explore the potential for expansion into California. They state that "since franchisors have little control over, or visibility into, the length of the registration process, an exemption (from registration) would save some franchisors from missing trade shows that are often critical to their evaluation of growth potential or anticipated expansion into the California market."

Need for the Bill. According to the author, this bill is needed to remove barriers to potential new franchise investment in California, particularly by foreign companies or prospective franchisors not registered with DBO but simply seeking to participate in trade shows prior to any formal intent to offer franchises for sale. The author states that:

(The CFIL) creates a potential barrier for franchisors interested in assessing the public’s interest in their franchise concepts by participating in trade shows in California before undertaking the cumbersome and costly registration process. This discourages rather than encourages new franchise investment in California and limits the public’s exposure to potential business opportunities that may become available in California if there is interest.

AB 1782 would amend the CFIL to permit a franchisor who does not have a currently effective franchise registration and/or a disclosure document to display at a franchise trade show for the limited purpose of determining whether there is sufficient interest in its franchise to warrant the time and expense of preparing a franchise disclosure document and pursuing a California registration.

Expanding opportunity for unregistered and prospective franchisors in California to exhibit at trade shows. This bill seeks to create an avenue for unregistered franchisors and prospective franchisors to operate an exhibition booth at a California trade show, while still maintaining consumer protections restricting the offer and sale of franchises. (As used hereafter, the term “unregistered franchisor” shall be considered to include prospective franchisors as well.) In light of the DBO's interpretation of the statute that an unregistered franchisor's exhibit at a trade show constitutes an impermissible offer to sell a franchise, this bill specifically provides that an offer to sell is not made merely because the unregistered franchisor has secured a space at a franchise trade show and offers information about its products, services, or system to the general public, as long as the party discloses certain information about its franchise concept, principal officers, and business addresses to the public and the DBO, as a specified.

First, the unregistered franchisor must notify the DBO of its intent to attend and display its concept at the trade show at least fourteen days before the show. Second, the unregistered franchisor must provide the DBO with additional documentation identifying its business, addresses, and principal officers, as specified. If the company already has a current franchise disclosure document not yet registered in California, then it must also provide a copy to the DBO with the above documentation. Finally, the unregistered franchisor must conspicuously post, in public view within its booth at the trade show, a specified notice cautioning attendees that it is not offering a franchise for sale in California, and that it is not legally able to offer a franchise for sale in California. This notice must also include, at a minimum, the DBO commissioner's contact information and a statement that if anyone associated with the franchisor offers a franchise for sale, or solicits an offer to purchase a franchise in California, that action should be reported to the commissioner. Together, these requirements are intended to increase the DBO's ability to maintain oversight and recordkeeping over unregistered companies exhibiting at franchise trade shows before they have officially registered as franchisors in California.

Recent amendments require prospective franchisors to disclose additional identifying information to enable DBO oversight. According to proponents, many of the companies who stand to benefit from participating in trade shows under this bill are either young companies exploring whether to get into the business of selling franchises, or companies already franchised in another state or another country--in either case, unregistered as a franchisor in California and likely to be unknown to DBO. To safeguard against the possibility that members of the public may be victimized by unscrupulous trade show exhibitors who engage with prospective consumers, the author recently amended the bill to require any unregistered franchisor wishing to exhibit at a trade show to provide the commissioner of DBO with a document containing identifying information about the business and its officers. Specifically, this document, at a minimum, shall include: 1) the franchise concept brand name and a brief description of the potential franchise offering; 2) the name of the parent corporation or controlling entity, and the address where it is domiciled; 3) the names of the executive officers of the parent corporation or controlling entity; and 4) the address where the corporation or entity may be served legal process. Disclosure of this information to DBO is intended to protect consumers and ensure that DBO has sufficient information about the unregistered franchisor for oversight purposes, including the ability to track down and further investigate the company if some problem is later reported as a result of its participation in the trade show.

In addition, the bill requires that any unregistered franchisor that already possesses a current franchise disclosure document to provide DBO with a copy of that disclosure document as a condition of being allowed to exhibit at a trade show. The Committee notes that, under FTC rules, any company selling a franchise anywhere in the United States is already required to possess a FDD that they provide to prospective franchisees (16 CFR Part 436.2). Therefore, this requirement will likely be a mere formality for existing out-of-state franchisors may enhance DBO oversight by providing relevant, detailed information about the franchise brand and the company itself. For companies without a FDD (for example, because they are still in the startup phase or because they are foreign-based), this requirement does not apply and poses no obstacle. It should be noted, though, that under the CFIL, a franchisor must ultimately complete the full registration process and submit the franchise disclosure document to DBO before it may offer or sell franchises in California in any case.

Notification to prospective franchisors of duty to register with DBO before a franchise may be offered or sold. Because companies allowed to exhibit at franchise trade shows under this bill may be either inexperienced in franchising or from another state or country, they may not yet be familiar with California franchise laws. In order to safeguard against possible violations of the CFIL by these actors, the bill as recently amended requires the DBO-approved form used by an unregistered franchisor to indicate its intent to attend and exhibit at a trade show (see above) to also provide a reminder to the company of its duty to register with the DBO before it may legally offer or sell a franchise in this state. The bill preserves the discretion of DBO to determine the form and content of the overall notice, but does require this specific information to be included, at a minimum, in the final document approved by DBO.

Clarification of important definitions. This bill was recently amended to clarify the use of the terms “franchise trade show” and “franchisor.” First, the definition of "franchise trade show" was modified to delete an unnecessary sentence and clarify that a trade show is an event displaying multiple franchise brands and open to multiple franchisors. In other words, an event organized by a single franchisor or parent company assembling multiple franchisees or prospective franchisees only of that brand would not fall under the definition of "trade show" for purposes of this act. Second, Section 31007 defines a "franchisor" simply as a person who grants a franchise. Because this bill is specifically targeted towards companies that cannot grant a franchise or that have not yet decided whether to get into the business of granting franchises, the bill was amended appropriately to also include the more accurate term "prospective franchisor,” in order to avoid creating any potential loopholes in the law.

ARGUMENTS IN SUPPORT: In support of the bill, the Business Law Section of the State Bar contends that the bill will benefit not only franchisors and prospective franchisors, but also prospective franchisees. They state:

The exemption (from registration) will enhance prospective franchisee knowledge of the potential types of franchises that may, at some point, be available within California for the particular market. The exemption will also drive competition between franchise systems, including those already registered in California, to improve products and innovate their systems to the benefit of current franchisees and consumers . . . (and) will drive competition between franchisors to attract new franchisees, thereby potentially enhancing the terms extended to potential franchisees.

REGISTERED SUPPORT / OPPOSITION:

Support

Franchise Law Committee, Business Law Section of the State Bar (sponsor)

Opposition

None on file

Analysis Prepared by: Anthony Lew / JUD. / (916) 319-2334