BILL ANALYSIS Ó
AB 1782
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Date of Hearing: March 15, 2016
ASSEMBLY COMMITTEE ON JUDICIARY
Mark Stone, Chair
AB 1782
(Maienschein) - As Amended 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
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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.
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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:
a) 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.
b) 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.
c) 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
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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
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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.
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(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"
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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
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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
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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.
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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.
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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.
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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