Back in December 2022, we published a blog informing readers that guidance on franchise sales brokers and agents may be on the horizon. The North American Securities Administrators Association’s (“NASAA”) Franchise and Business Opportunities Project Group told us at the 2022 ABA Forum on Franchising Annual Meeting that it was focused on evaluating a model for third party franchise seller registration. At the time we did not have any information beyond the announcement, but it looks like the State of California is paving the way with its new proposed Senate Bill No. 919. Senate Bill No. 919 would fundamentally change the franchise sales process by amending the California Franchise Investment Law (“CFIL”) to require third-party franchise sellers and brokers (“franchise brokers”) to file a sellers disclosure form and provide standardized disclosures to prospective franchisees.
Many franchise systems rely on outside franchise sales consultants and brokers, rather than their own internal sales team, to find, solicit, offer and facilitate the sale of franchises to prospective franchisees. These brokers and sales agents are often the main contact and provider of information as between the franchisor and prospective franchisee. Franchise brokers are then paid commissions or success fees by the franchisor. However, the FTC Rule does not require any national registration or licensing program for franchise sales brokers and only two states, New York and Washington, maintain a separate registration process. With the proliferation in use of franchise sales brokers, there has been a corresponding increase in franchise broker competency issues with stories about bad actors selling to unqualified candidates, misrepresenting franchise offerings, and making unauthorized financial performance representations. Bill 919 was crafted with assistance by the International Franchise Association (“IFA”) as part of the IFA’s responsible franchising initiative.
If passed, Bill 919 would require third-party franchise sellers, not only to register with the State of California (as currently required in New York and Washington), it would also require affirmative disclosures be provided to prospective franchisees that are residents of California or who seek to operate a franchise in the state, including, among other information:
- contact information including the franchise broker’s legal and trade names, state and year of formation, principal address, owners and key personnel;
- the franchise broker’s most recent 5 years of experience;
- criminal and legal history;
- how the franchise broker is compensated, including how the amount of compensation is calculated;
- a list of industries and the number of brands within each industry that the franchise broker represents;
- a description of services to be provided by the franchise broker; and
- the name and contact information for every franchisee that the franchise broker sold a franchise during the last calendar year, including the number of units sold to each franchisee.
Senate Bill No. 919 would also create a cause of action that allows franchisees to sue for damages and rescission under the CFIL if the franchise broker violates the law with respect to a franchise sale.
The proposed filing fee for an initial registration application would be $250, with a $150 annual renewal fee and $50 fee to amend a registration upon a material change to the application information. If passed, the amendment to the CFIL would go into effect on July 1, 2025.
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