FRANCHISOR 101: EXPLORING EXEMPTIONS UNDER CALIFORNIA'S FRANCHISE INVESTMENT LAW-PART 1
Over the next several months, we will explore exemption based franchising in California. This month, we will provide an overview and consider the benefits and risks related to claiming exemptions. Next month, we will examine the most utilized exemptions. In October, we will briefly discuss the remaining, lesser known exemptions.
Under California's Franchise Investment Law (the "FIL"), it is unlawful to offer or sell "a franchise" in California unless the offering has been registered with the Commissioner of Corporations (the "Commissioner"), or it is exempt. An offering is a "franchise" if the business will be substantially associated with the franchisor's trademark, an element of control exists (i.e. a system or marketing plan substantially prescribed by the franchisor), and the franchisee pays a fee. Even if these elements exist, an offering may be exempt from registration under one of approximately 12 exemptions provided in the FIL, or by rule or order of the Commissioner.
From the franchisor's perspective, claiming an exemption holds the allure of saving time and money, avoiding certain risks related to supplying incomplete information, allowing the exchange of information otherwise restricted by the FIL and protecting confidential aspects of its franchise system from disclosure. On the flip side, choosing to claim an exemption is not a no-brainer. To start with, the exemption statutes are confusing and have varying requirements. For example, many exemptions require the franchisor to pay a fee and file Notice with the Department of Corporations (the "DOC") annually. Others require the franchisor to file Notice within 15 days of each exempt transaction. Some exemptions apply to both registration and disclosure. Others apply only to registration, which means that while the franchisor need not register its offering prospectus and franchise documents prior to making an offer or sale, it must, nonetheless, provide prospective purchasers with accurate disclosures in advance of signing any franchise documents or collecting any payments. If disclosure is required, the franchisor won't recognize the cost and time savings or confidentiality benefits it had hoped for.
With that basic overview in mind, we will be ready to look at the exemptions available under the FIL next month.