BILL NUMBER: SB 538	INTRODUCED
	BILL TEXT


INTRODUCED BY   Senator Hill

                        FEBRUARY 22, 2013

   An act to amend Sections 31101, 31107, 31109.1, 31114 and 31119 of
the Corporations Code, relating to franchises.


	LEGISLATIVE COUNSEL'S DIGEST


   SB 538, as introduced, Hill. Franchises.
   The Franchise Investment Law generally provides for the regulation
of the offer and sale of franchises. The law requires specific
written disclosures, including, but not limited to, an offering
circular, and authorizes the sale of a franchise to be exempt from
specified requirements if the franchisor meets certain disclosure and
notice requirements.
   This bill, for that exemption to apply, would modify the
requirement that certain written disclosures be made by a franchisor
at least 10 business days prior to the sale or material modification
of a franchise and instead require those disclosures to be made at
least 14 days prior to the sale or modification. The bill also would
replace the term for a written document called an "offering circular"
with the term "franchise disclosure document."
   Vote: majority. Appropriation: no. Fiscal committee: no.
State-mandated local program: no.


THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:

  SECTION 1.  Section 31101 of the Corporations Code is amended to
read:
   31101.  There shall be exempted from the provisions of Chapter 2
(commencing with Section 31110) of this part the offer and sale of a
franchise if the franchisor complies with each of the following
minimum net worth, experience, disclosure, and notice filing
requirements:
   (a) Net worth. The franchisor and, when necessary, a corporation
owning at least 80 percent of the franchisor (parent) meet one of the
following net worth requirements, according to financial statements
for the fiscal year just ended. The franchisor and the parent, when
necessary, may rely upon the immediately preceding fiscal year's
audited financial statement for 15 months from that fiscal year end
date.
   (1) The franchisor has a net worth on a consolidated basis of not
less than five million dollars ($5,000,000), according to its audited
financial statement.
   (2) The franchisor has a net worth of not less than one million
dollars ($1,000,000) and its parent has a net worth of five million
dollars ($5,000,000), according to the audited financial statements
of the franchisor and its parent, respectively.
   (3) The franchisor has a net worth of one million dollars
($1,000,000), according to its unaudited financial statement, and the
parent has a net worth on a consolidated basis of not less than five
million dollars ($5,000,000), according to its audited financial
statement, and the parent absolutely and unconditionally guarantees
to assume the duties and obligations of the franchisor under the
franchise agreement should the franchisor become unable to perform
its duties and obligations.
   (b) Experience. The franchisor or a corporation owning at least 80
percent of the franchisor (parent) complies with one or more of the
following conditions throughout the five-year period immediately
preceding the offer and sale of the franchise, or complies with one
of the following conditions during part of the period and one or more
of the following conditions during the balance of the period:
   (1) The franchisor has had at least 25 franchisees conducting
business which is the subject of the franchise.
   (2) The franchisor has conducted business which is the subject of
the franchise.
   (3) The parent has had at least 25 franchisees conducting business
which is the subject of the franchise.
   (4) The parent has conducted business which is the subject of the
franchise.
   (c) Disclosure. (1) Except as provided in subparagraph (2), the
franchisor discloses in writing to each prospective franchisee, at
least  10 business   14  days prior to the
execution by the prospective franchisee of any binding franchise or
other agreement, or at least  10 business   14
 days prior to the receipt of any consideration, the following
information:
   (A) The name of the franchisor, the name under which the
franchisor is doing or intends to do business, and the name of any
parent or affiliated company that will engage in business
transactions with franchisees.
   (B) The franchisor's principal business address and the name and
address of its agent in the State of California authorized to receive
service of process.
   (C) The business form of the franchisor, whether corporate,
partnership, or otherwise.
   (D) The business experience of the franchisor, including the
length of time the franchisor (i) has conducted a business of the
type to be operated by the franchisees, (ii) has granted franchises
for such business, and (iii) has granted franchises in other lines of
business.
   (E) A copy of the typical franchise contract or agreement proposed
for use or in use in this state.
   (F) A statement of the franchise fee charged, the proposed
application of the proceeds of such fee by the franchisor, and the
formula by which the amount of the fee is determined if the fee is
not the same in all cases.
   (G) A statement describing any payments or fees other than
franchise fees that the franchisee or subfranchisor is required to
pay to the franchisor, including royalties and payments or fees which
the franchisor collects in whole or in part on behalf of a third
party or parties.
   (H) A statement of the conditions under which the franchise
agreement may be terminated or renewal refused, or repurchased at the
option of the franchisor.
   (I) A statement as to whether, by the terms of the franchise
agreement or by other device or practice, the franchisee or
subfranchisor is required to purchase from the franchisor or his or
her designee services, supplies, products, fixtures, or other goods
relating to the establishment or operation of the franchise business,
together with a description thereof.
   (J) A statement as to whether, by the terms of the franchise
agreement or other device or practice, the franchisee is limited in
the goods or services offered by him or her to his or her customers.
   (K) A statement of the terms and conditions of any financing
arrangements when offered directly or indirectly by the franchisor or
his or her agent or affiliate.
   (L) A statement of any past or present practice or of any intent
of the franchisor to sell, assign, or discount to a third party any
note, contract, or other obligation of the franchisee or
subfranchisor in whole or in part.
   (M) If any statement of estimated or projected franchisee earnings
is used, a statement of such estimation or projection and the data
upon which it is based.
   (N) A statement as to whether franchisees or subfranchisors
receive an exclusive area or territory.
   (O) A copy of the financial statement or statements required by
subdivision (a).
   (P) A copy of the unconditional guaranty, if applicable, required
by paragraph (3) of subdivision (a).
   (2) In the case of a material modification of an existing
franchise, the franchisor discloses in writing to each franchisee
information concerning the specific sections of the franchise
agreement proposed to be modified and such additional information as
may be required by rule or order of the commissioner. Any agreement
by such franchisee to such material modifications shall not be
binding upon the franchisee if the franchisee, within  10
business   14  days after the receipt of such
writing identifying the material modification, notifies the
franchisor in writing that the agreement to such modification is
rescinded. A writing identifying the material modification is
received when delivered to the franchisee. A written notice by the
franchisee rescinding an agreement to a material modification is
effective when delivered to the franchisor or when deposited in the
mail, postage prepaid, and addressed to the franchisor in accordance
with any notice provisions in the franchise agreement, or when
delivered or mailed to the person designated in the franchise
agreement for the receipt of notices on behalf of the franchisor.
   (d) Notice filing. The franchisor has filed with the commissioner
a notice of exemption and paid the fee required by subdivision (f) of
Section 31500 prior to an offer or sale of a franchise in this state
during any calendar year in which one or more franchises are sold,
excluding any material modification.
  SEC. 2.  Section 31107 of the Corporations Code is amended to read:

   31107.  There shall be exempted from the provisions of Chapter 2
(commencing with Section 31110) of this part, any offer (but not the
sale) by a franchisor of a franchise while an application for renewal
or amendment is pending if the prospective franchisee receives all
of the following:
   (a) The  offering circular   franchise
disclosure document  and its exhibits as filed with the
commissioner with the application for renewal or amendment.
   (b) A written statement from the franchisor that (1) the filing
has been made but is not effective, (2) the information in the
 offering circular   franchise disclosure
document  and exhibits has not been reviewed by the
commissioner, and (3) the franchisor will deliver to the prospective
franchisee an effective  offering circular  
  franchise disclosure document  and exhibits at least
 10 business   14  days prior to execution
by the prospective franchisee of a binding agreement or payment of
any consideration to the franchisor, or any person affiliated with
the franchisor, whichever occurs first, showing all material changes
from the  offering circular    
franchise disclosure document  and exhibits received by the
prospective franchisee under subdivision (a) of this section.
   (c) The  offering circular    
franchise   disclosure document  and exhibits in
accordance with paragraph (3) of subdivision (b) of this section.
  SEC. 3.  Section 31109.1 of the Corporations Code is amended to
read:
   31109.1.  (a) There shall be exempted from the provisions of
Chapter 2 (commencing with Section 31110) the offer and sale of a
franchise registered under Section 31111, 31121, or 31123 on terms
different from the terms of the offer registered thereunder if all of
the following requirements are met:
   (1) The initial offer is the offer registered under Section 31111,
31121, or 31123.
   (2) The prospective franchisee receives all of the following in a
separate written appendix to the  offering circular:
  franchise   disclosure document: 
   (A) A summary description of each material negotiated term that
was negotiated by the franchisor for a California franchise during
the 12-month period ending in the calendar month immediately
preceding the month in which the negotiated offer or sale is made
under this section.
   (B) A statement indicating that copies of the negotiated terms are
available upon written request.
   (C) The name, telephone number, and address of the representative
of the franchisor to whom requests for a copy of the negotiated terms
may be obtained.
   (3) The franchisor certifies or declares in an appendix to its
application for renewal that it has complied with all of the
requirements of this section, in the event this exemption is claimed.

   (4) The negotiated terms, on the whole, confer additional benefits
on the franchisee.
   (b) The franchisor shall provide a copy of the negotiated terms
described in subdivision (a) to the prospective franchisee within
five business days following the request of the franchisee.
   (c) The franchisor shall maintain copies of all material
negotiated terms for which this exemption is claimed for a period of
five years from the effective date of the first agreement containing
the relevant negotiated term. Upon the request of the commissioner,
the franchisor shall make the copies available to the commissioner
for review. For purposes of this section, the commissioner may
prescribe by rule or order the format and content of the summary
description of the negotiated terms required by subparagraph (A) of
paragraph (2) of subdivision (a).
   (d) For purposes of this section, "material" means that a
reasonable franchisee would view the terms as important in
negotiating the franchise.
  SEC. 4.  Section 31114 of the Corporations Code is amended to read:

   31114.  The application for registration shall be accompanied by a
proposed  offering circular    
franchise disclosure document  , 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. The  offering
circular     franchise   disclosure
document  shall recite in bold type of not less than 10-point
type that registration does not constitute approval, recommendation,
or endorsement by the commissioner.
  SEC. 5.  Section 31119 of the Corporations Code is amended to read:

   31119.  (a) It is unlawful to sell any franchise in this state
that is subject to registration under this law 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 
offering circular     franchise disclosure
document  , together with a copy of all proposed agreements
relating to the sale of the franchise.
   (b) Nothing in this division shall be construed to prevent a
franchisor from providing copies of the  offering circular
    franchise disclosure  documents to
prospective franchisees through electronic means pursuant to any
requirements or conditions that may be imposed by rule or order of
the commissioner.