BILL ANALYSIS Ó
SENATE COMMITTEE ON
BANKING AND FINANCIAL INSTITUTIONS
Senator Steven Glazer, Chair
2015 - 2016 Regular
Bill No: AB 1782 Hearing Date: June 15,
2016
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|Author: |Maienschein |
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|Version: |March 10, 2016 Amended |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Eileen Newhall |
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Subject: Franchises: offer to sell: trade show
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
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registration described immediately above:
a. 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.
b. 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
4. Provides for the Franchise Investment Law (FIL;
Corporations Code Section 31000 et seq.), administered by
DBO.
5. 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):
a. 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;
b. The operation of the franchisee's business pursuant
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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;
c. The franchisee is required to pay, directly or
indirectly, a franchise fee.
6. 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).
7. 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).
8. 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
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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.
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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:
a. The Franchise Law Committee of the Business Law
Section of the California State Bar is sponsoring this
bill for the reasons stated above.
b. 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
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California State Bar (sponsor)
International Franchise Association
Opposition
None received
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