Disclosures in Sales of Franchises

Corporations Code Title 4, Division 5, Part 2, Chapter 2 deals with disclosures in the regulation of the sale of franchises in the State of California.

Section 31110 makes it unlawful for any person to offer or sell any franchise in this state unless the offer of the franchise has been registered under this part or exempted.

Section 31111 requires the application for registration of an offer to be filed with the commissioner upon the Uniform Franchise Registration Application, as identified, modified, and supplemented by rule of the commissioner.

Section 31112 requires any application or amendment under this law to be signed and verified by the franchisor or by the subfranchisor.

Section 31113 states that, if the commissioner finds that it is necessary and appropriate for the protection of prospective franchisees or subfranchisors because the applicant has failed to demonstrate that adequate financial arrangements have been made to fulfill the franchisor’s obligations to provide real estate, improvements, equipment, inventory, training, or other items included in the offering, the commissioner may by rule or order require the escrow or impound of franchisee fees and other funds paid by the franchisee or subfranchisor until the obligations have been satisfied. At the option of the franchisor, the franchisor may furnish a surety bond as provided by rule of the commissioner.

Section 31114 requires the application for registration to be accompanied by a proposed franchise disclosure document, which is required to contain specified information.

Section 31115 authorizes the commissioner to summarily issue a stop order denying the effectiveness of or suspending or revoking effectiveness of any registration if the commissioner finds any of the six specified provisions.

Section 31116 provides that, if no stop order is in effect under this law, registration of the offer of franchises automatically becomes effective at 12 p.m., California time, of the 30th business day after the filing of a complete application for registration or the last preeffective amendment thereto, or at an earlier time that the commissioner determines.

Section 31117 provides that, upon the entry of a stop order, the commissioner is required to promptly notify the applicant that it has been entered and of the reasons therefor and that upon receipt of written request the matter will be set down for hearing to commence within 15 business days after such receipt unless the applicant consents to a later date.

If no hearing is requested within 30 days after receipt of the notice and none is ordered by the commissioner, the order will remain in effect until it is modified or vacated by the commissioner. If a hearing is requested or ordered, the commissioner, after notice and hearing, the commissioner has all of the powers granted, and may modify or vacate the order or extend it until its final determination.

Section 31118 allows the commissioner to vacate or modify a stop order if he or she finds that the conditions which caused its entry have changed or that it is otherwise in the public interest to do so.

Section 31119 makes it unlawful to sell any franchise in this state that is subject to registration under this law without first providing to the prospective franchisee, at least 14 days prior to the execution by the prospective franchisee of any binding franchise or other agreement, a copy of the franchise disclosure document, together with a copy of all proposed agreements relating to the sale of the franchise.

Section 31120 requires a franchise offering to be deemed duly registered for a period of one year from the effective date of the registration, unless the commissioner by order or rule specifies a different period.

Section 31121 allows the registration to be renewed for additional periods of one year each, unless the commissioner by rule or order specifies a different period, by submitting to the commissioner a renewal application before the expiration of the registration.

Section 31122 requires the registration renewal to be in the form and content prescribed by the commissioner, and be accompanied by a proposed offering prospectus.

Section 31123 requires a franchisor to promptly notify the commissioner in writing, by an application to amend the registration, of any material change in the information contained in the application as originally submitted, amended or renewed.

Section 31124 provides that an amendment to an application filed after the effective date of the registration of the sale of franchises, if such amendment is approved by the commissioner, becomes effective on the date as the commissioner may determine.

Section 31125 specifies that an application for registration of a material modification of an existing franchise or of existing franchises is to be in a form and contain information as the commissioner may by rule prescribe, and be accompanied by a proposed disclosure form as specified.

Any modification of a franchise agreement with an existing franchisee of a franchisor is to be exempted from the provisions of this chapter, if all of the specified requirements are met.

Section 31126 provides that a prospective franchisee seeking to buy an existing franchise, all or substantially all of the assets of an existing franchise business, or an interest in an existing franchise business is required do all of the specified acts when applying with the franchisor to buy that franchise, those assets, or that interest.