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: 8/19/16 in Senate
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 and prospective 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.
Senate Floor Amendments of 8/19/16 add to the types of
information that must be submitted to DBO before a franchisor or
prospective franchisor may exhibit an unregistered franchise
offering at a trade show; require the information to be
submitted at least 30 days before the trade show; impose a fee
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of $225 per day, which franchisors must pay to the Commissioner
of DBO each day they exhibit an unregistered offering at a trade
show; clarify that DBO may issue a stop order denying the
effectiveness of a franchisor's trade show exemption, if DBO
makes specified findings about the offering; and sunset the bill
on January 1, 2022.
ANALYSIS:
Existing law:
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, until January 1, 2022:
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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 a franchisor who is not then offering
a franchise for sale in California and has not registered a
franchise offering under the provisions of the FIL, secures
space at a franchise trade show, from which it offers
information about its products, services, or system to the
general public, as long as the franchisor or prospective
franchisor does all of the following:
a) Notifies 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 30 days before the show. This notice must provide
the commissioner with all of the following:
i) Franchise concept brand name;
ii) Brief description of the potential franchise
offering;
iii) Legal name and, if applicable, the name under
which the franchisor or prospective franchisor does or
intends to do business;
iv) Address where the franchisor or prospective
franchisor is domiciled and the state (or country, if
outside the United States) where it is organized;
v) Names of the directors, trustees, general
partners, principal officers, and other executives of
the franchisor or prospective franchisor who will have
management responsibility over the franchisor or
prospective franchisor, and disclosure of whether any
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of these persons have been convicted of or pleaded nolo
contender to any felony, been held liable in a civil
action by final judgment of a court for fraud,
embezzlement, or misappropriation of property, or has
previously violated any franchise law of any state.
vi) Address at which the franchisor or prospective
franchisor may be served legal process;
vii) Proposed written or electronic information that
the franchisor or prospective franchisor intends to
distribute or use at the trade show;
viii) Disclosure of whether any of the employees or
representatives who will be attending the trade show on
behalf of the franchisor or prospective franchisor has
been convicted of or pleaded nolo contender to any
felony, been held liable in a civil action by final
judgment of a court for fraud, embezzlement, or
misappropriation of property, or has previously
violated any franchise law of any state;
ix) Copy of the franchise disclosure document, if
applicable.
b) Conspicuously posts, 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.
c) Pays a fee of $225 per day to the commissioner for each
day the franchisor or prospective franchisor exhibits at
the trade show.
3)Provides that the commissioner may summarily issue a stop
order denying the effectiveness of an applicant's trade show
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exemption, if the commissioner finds any of the following:
a) The proposed business model is not lawful in California.
b) A director, trustee, general partner, principal officer,
or other executive who will have management responsibility
of a franchisor or prospective franchisor, or an employee
or representative who will be attending the franchise trade
show on behalf of the franchisor or prospective franchisor
has been convicted of or pleaded nolo contender to any
felony; been held liable in a civil action by final
judgment of a court for fraud, embezzlement, or
misappropriation of property; or has previously violated
any franchise law of any state.
c) The business would constitute a misrepresentation to or
deceit or fraud of investors.
d) The franchisor or prospective franchisor fails to submit
required information to the commissioner.
4)Clarifies that persons issued a stop order are eligible to
appeal that order pursuant to procedures specified in the
Administrative Procedures Act.
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
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
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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
franchisees. By facilitating a franchisor's abilities to test
the market in California, this bill will increase franchisees'
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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.
Amendments made to the bill on August 19, 2016 reflect technical
assistance provided by DBO.
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: (Verified )
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,
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Page 8
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,
Wood, Rendon
NO VOTE RECORDED: Irwin, Levine, Melendez, Nazarian
Prepared by: Eileen Newhall / B. & F.I. / (916) 651-4102
8/22/16 23:30:17
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