USA – CALIFORNIA Law and Practice Contributed by: Dawn Newton and Hayley M. Lenahan, Donahue Fitzgerald
Exemptions Not Requiring an Exemption Notice There are also a few exemptions that do not require the filing of any exemption notice. These include the following. An exemption for sales by the franchisor outside California An offer or sale to a resident of another state, US ter - ritory or foreign country is exempt if all locations from which the franchised business conducts transactions with customers or distributes goods or services are physically located outside California. An exemption for the offer but not the sale of a franchise while a timely filed renewal application is pending A franchisor may continue to offer, but may not sell, franchises while a renewal or amendment application is pending with the DFPI. The prospective franchisee must receive the FDD filed with the pending applica - tion together with prescribed notice that the filing is not yet effective, and must receive the effective FDD reflecting any material changes at least 14 days before signing a binding agreement or paying consideration. The CFIL also notes that the offer or sale of a franchise by a franchisee for its own account is not a franchise sale subject to the disclosure and registration require - ment, provided that the franchisor does not engage in the sale other than to approve the buyer, and that a business operating as a non-profit co-operative is not a franchise arrangement. 2.4 Franchise Disclosure Language/ Translation Requirements The DFPI conducts business in English and requires that franchise disclosure documents be submitted to the agency in English. Translation into a language oth - er than English is not required by any franchise laws in California. California Civil Code Section 1632 requires a written translation of certain consumer contracts that are negotiated “primarily” in Spanish, Chinese, Tagalog, Vietnamese or Korean. Because the statute generally applies to transactions entered into for per - sonal, family or household purposes, it is unlikely to apply to most franchise agreements. However, Sec - tion 1632 also applies to the negotiation of leases and rental agreements for non-residential commercial
spaces. Accordingly, if a franchisor leases premises to a franchisee and negotiates the lease primarily in one of the five covered languages, the franchisor may be required to provide the franchisee with a translation of the lease document in that language. International franchisors should be aware that the DFPI requires franchisors to use US dollar figures in dis - closure documents, and requires financial statements included in the disclosure document to be prepared in accordance with US generally accepted accounting principles (US GAAP). Franchisors that intend to cal - culate and collect fees in a currency other than the US dollar are required to convert their fees into US dollar for purposes of the disclosure document, noting the specific conversion rate used, although they may still collect the fees in another currency based on then- current conversion rates as long as their disclosure document clearly states that they will do so. Except for exempt scenarios, a franchisor must reg - ister with the DFPI prior to offering or selling a fran - chise in California or to a California resident. An offer is defined as “every attempt to dispose of, or solicita - tion of an offer to buy…” (Section 31018). As a prac - tical matter, this definition is broad and designed to prohibit a prospective franchisor from pre-negotiating the terms of a franchise offer with a prospect prior to securing its registration in California. 3.2 Franchise Registration Process The DFPI franchise application process requires a franchisor to submit a complete copy of its FDD, together with application forms and related docu - ments. The DFPI maintains a list of the requirements on its website, with clear instructions. A typical application consists of: • a cover letter – identifying the franchisor and, if applicable, the identification number the DFPI has previously assigned to the franchisor; • a completed Uniform Franchise Registration Appli - cation form; 3. Franchise Registration 3.1 Mandatory Registration
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