BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 1782| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- 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: AB 1782 Page 2 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 AB 1782 Page 3 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 AB 1782 Page 4 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 AB 1782 Page 5 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, AB 1782 Page 6 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 **** END ****