Exploring Exemptions Under California’s Franchise Investment Law – Part 2

Franchisors claiming exemptions must be certain they truly qualify-a determination that can sometimes be difficult. As pointed out in last month’s discussion, some California franchise investment law exemptions relieve the franchisor from registration and presale disclosure requirements, while others merely excuse the franchisor from registration. These exemptions release a franchisor from both requirements:

A:       Experienced Franchisee Exemption: An offer is exempt from registration and disclosure if 1) one or more owners of at least 50% of the purchaser, not controlled by the franchisor, has 24 months experience w/in the last 7 years conducting the financial and operational aspects of a substantially similar business; AND, 2) the franchisor files the specified notice with the Department of Corporations (the “DOC“) and pays the required fee within 15 days of the sale.

B:       Insider-Controlled Franchisee Exemption: An offer is exempt from registration and disclosure if 1) one or more owners of at least 50% of the purchasing franchisee, not controlled by the franchisor, has been, within 60 days of the sale, an officer, director, managing agent or 25% owner of the franchisor for at least 24 months; AND, 2) the franchisor files the specified notice with the DOC and pays a fee within 15 days of the sale.

C:       Additional Franchise Exemption: An offer is exempt from registration and disclosure if 1) the purchaser is an existing franchisee or an entity that has an officer, director, managing agent or 25% owner who is an existing franchisee and who has 24 months experience within the last 7 years conducting the financial and operational aspects of a substantially similar business; AND, 2) the franchisor files the specified notice with the DOC and pays a fee within 15 days of the sale.

 D:       Accredited Franchisee Exemption: An offer is exempt from registration and disclosure if each purchasing franchisee is either 1) anEntity with total assets over $5,000,000; OR, 2) an Individual with a net worth over $1,000,000 or gross income over $300,000 individually, or $500,000 with his or her spouse; OR, 3) an insider of the franchisor or its corporate general partner; AND, 4) the franchisor reasonably believes the purchaser can evaluate the risks and merits to protect his interests; AND, 5) the purchasing franchisee intends to conduct the business, not resell or distribute it; AND, 6) the initial investment does not exceed 10% of purchasing franchisee’s net worth; AND, 7) the franchisor files the specified notice with the DOC and pays a fee in advance of the sale.

The sale of a franchise erroneously believed to be exempt is a sale of an unregistered franchise forbidden by California law. See the attachedsummary of California franchise exemptions.

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