BILL ANALYSIS Ó
AB 1782
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB
1782 (Maienschein)
As Amended August 19, 2016
Majority vote
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|ASSEMBLY: |76-0 |(April 14, |SENATE: |39-0 |(August 23, |
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Original Committee Reference: JUD.
SUMMARY: Authorizes companies that have not registered with the
Department of Business Oversight (DBO) to sell franchises in
California to exhibit at a franchise trade show if specified
disclosures are made to the DBO and to trade show attendees, and
an exemption fee is paid to the DBO. 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:
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a) Notifies the commissioner of its intent to attend and
display its concept at the franchise trade show at least 30
days before the show, in a form established by the
commissioner.
b) Accompanying the above notification, provides the
commissioner with: i) 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; ii) a copy of the franchise disclosure
document (FDD), if it already possesses a current FDD not
yet registered in California; iii) disclosure of any crimes
or adverse actions, as specified, against any corporate
directors or officers, or any employees or representatives
attending the franchise trade show; and iv) the proposed
information that the franchisor intends to distribute or
use at the trade show.
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
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 in 1)a) 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)Requires a payment of a $225 fee to the DBO for each day the
franchisor or prospective franchisor exhibits at the trade
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show.
4)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.
5)Authorizes the commissioner to summarily issue a stop order
denying the effectiveness of an applicant's exemption
application 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: i) convicted of or pleaded nolo contendere to
any felony; ii) held liable in a civil action by final
judgment of a court for fraud, embezzlement, or
misappropriation of property; or iii) 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 meet
the notification requirements described in 1) and 2) above.
6)Provides that appeal of the denial of the stop order described
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above is governed by procedures already specified by existing
law, Corporations Code Section 31117
7)Establish a sunset date of January 1, 2022, for all of these
provisions
The Senate amendments:
1)Require prospective franchisors to make additional
disclosures, including the proposed information it intends to
distribute, to the DBO commissioner as part of its
notification of intent to attend and display at a trade show.
2)Require a payment of a $225 fee to the DBO for each day the
franchisor or prospective franchisor exhibits at the trade
show.
3)Authorize the DBO commissioner to issue a stop order denying a
franchisor's exemption application for failure to meet
specified criteria, and provides that appeal of the denial of
this type of stop order is governed by procedures already
specified by existing law.
4)Establish a sunset date of January 1, 2022 for all of these
provisions.
FISCAL EFFECT: 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.
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
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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.
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.
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"
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
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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."
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.
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 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.
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
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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. Require prospective
franchisors to make additional disclosures, including the
proposed information it intends to distribute, to the DBO
commissioner as part of its notification of intent to attend and
display at a trade show. 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.
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 Federal Trade Commission (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 Code of Federal Regulations 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.
Additional amendments. Recent Senate amendments authorize the
DBO commissioner to issue a stop order denying a franchisor's
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exemption application for failure to meet specified criteria,
including, for example, that the proposed business model is not
lawful in California, or that any corporate directors, officers,
or employees or representatives who will be attending the
franchise trade show on behalf of the franchisor or prospective
franchisor have been 1) convicted of or pleaded nolo contendere
to any felony; 2) held liable in a civil action by final
judgment of a court for fraud, embezzlement, or misappropriation
of property; or 3) previously violated any franchise law of any
state. As amended the bill also authorizes an appeal of the
denial of this type of stop order, which is to be governed by
procedures pursuant to existing law, Section 31117 of the
Corporations Code. Finally, recent Senate amendments require
the prospective franchisor to pay a $225 fee to the DBO for each
day the franchisor or prospective franchisor exhibits at the
trade show, and establish a sunset date of January 1, 2022 such
that all of these provisions will be in effect for five years
before they are repealed of their own accord.
Analysis Prepared by:
Anthony Lew / JUD. / (916) 319-2334 FN:
0004880