BILL ANALYSIS                                                                                                                                                                                                    Ó






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          |SENATE RULES COMMITTEE            |                       AB 1782|
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                                   THIRD READING 


          Bill No:  AB 1782
          Author:   Maienschein (R) 
          Amended:  3/10/16 in Assembly
          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 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:









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          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  







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            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: 

             a)   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.  

             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.

          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  







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          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  







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          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:    No          Fiscal  
          Com.:YesLocal:   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:   (Verified8/11/16)


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


          OPPOSITION:   (Verified8/11/16)


          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,  







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            Wood, Rendon
          NO VOTE RECORDED:  Irwin, Levine, Melendez, Nazarian

          Prepared by:Eileen Newhall / B. & F.I. / (916) 651-4102
          8/15/16 20:26:57


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