USA – CALIFORNIA Law and Practice Contributed by: Dawn Newton and Hayley M. Lenahan, Donahue Fitzgerald
ent must also be able to store, retrieve and print the document. A franchisor that divides the document into smaller files or includes links to external content such as its franchise sales website is not compliant. 2.2 Consequences of a Failure to Disclose The CFIL requires franchisors to provide prospective franchisees with the FDD and all proposed agree - ments at least 14 days before the franchisee signs a binding agreement or pays any consideration. A franchisor that sells a franchise without furnishing the required disclosure may be liable for damages. If the violation is wilful, the franchisee may also seek rescis - sion of the franchise agreement. Liability is not necessarily limited to the franchisor enti - ty. Controlling persons, partners, principal executive officers and directors, and employees who materially aid in the violation may be jointly and severally liable unless they lacked knowledge or reasonable grounds to know of the facts giving rise to the violation. The DFPI may also take enforcement action for viola - tions of the CFIL. It can issue desist-and-refrain orders and impose administrative penalties of up to USD2,500 per violation. The Commissioner may also bring a civil action seeking penalties of up to USD10,000 per vio - lation. Wilful violations can carry criminal penalties, including fines of up to USD100,000 and imprison - ment. 2.3 Franchise Disclosure Exemptions California offers a number of exemptions from the reg - istration and disclosure requirement under the CFIL. Some of these are niche or industry-specific, with exemptions for transactions related to a bank credit card plan and petroleum marketers. Broadly Applicable Exemptions Other exemptions are more broadly applicable. These are as follows. An exemption for qualifying large franchisors (Section 31101) An offer or sale is exempt if the franchisor, either alone or together with a qualifying parent, has a net worth of at least USD5 million based on audited financial statements and has at least five years of experience in
conducting the same type of business, either directly or through at least 25 franchisees. The franchisor must provide prospective franchisees with an unreg - istered disclosure document containing the informa - tion specified by statute, and must file a notice with the DFPI prior to the offer or sale of franchises under this exemption each calendar year. An exemption for the sale of a franchise to an insider An offer or sale is exempt if owners of at least 50% of the prospective franchisee have at least 24 months of experience, within the prior seven years, in managing the financial and operational aspects of a business offering substantially similar products or services, and are not controlled by the franchisor. The exemption may also apply to the sale of an additional franchise to an existing franchisee with at least 24 months of expe - rience in operating a substantially similar business. An exemption for the sale of a franchise to an experienced franchisee An offer or sale is exempt where owners holding at least 50% of the prospective franchisee are, or within the 60 days preceding the transaction were, an officer, director, managing agent or owner of at least a 25% interest in the franchisor, provided they held that posi - tion or interest for at least 24 months and are not con - trolled by the franchisor. An exemption for a large franchisee An offer or sale may be exempt if the purchaser meets specified financial and sophistication requirements, including certain entities with more than USD5 mil - lion in assets, individuals with more than USD1 million in qualifying net worth or specified income levels, and certain insiders. The purchaser must also have suf - ficient business and financial experience to evaluate An offer or sale may be exempt if the franchise is add - ed to an existing business that has operated for at least 24 months, offers substantially similar or related products or services, and will operate from the same location. The parties must also reasonably expect the franchise to generate no more than 20% of the fran - chisee’s annual sales. the merits and risks of the investment. An exemption for a fractional franchise
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