USA – CALIFORNIA Law and Practice Contributed by: Dawn Newton and Hayley M. Lenahan, Donahue Fitzgerald
• certification and financial records authorisation – the certification page, signed by an authorised person on behalf of the franchisor and certifying that the contents of the application are accurate, together with the authorisation for the disclosure of financial records; • consent to service of process – a completed Uni - form Consent to Service of Process; • supplemental information – the required sup - plemental information regarding the franchisor’s application in other states, the costs the franchisor expects to incur in establishing new franchises, and information about each sales agent who will participate in selling franchises on behalf of the franchisor; • internet advertising notice – an internet ad exemp - tion notice, if applicable; • a clean copy of the proposed FDD; • if applicable, a comparison copy of the FDD show - ing the changes between the proposed FDD and the prior year’s approved FDD; and • a letter of consent from the franchisor’s auditor. California franchise registrations expire 110 days after the end of the franchisor’s fiscal year. A franchisor must file a complete renewal application before that date to renew its registration; otherwise, it must file a new initial application. If a timely renewal is still pend - ing when the existing registration expires, the fran - chisor may generally continue to offer, but not sell, franchises in California if it complies with Corporations Code Section 31107. Under the FTC Franchise Rule, a start-up franchisor is permitted to use an unaudited financial statement in its first year. Many registration states reject this and require the franchisor to have an audit report in its first year of operation. California permits a start-up franchisor to present reviewed financial statements rather than a full audit in the first year. Thereafter, the franchisor must move to a standard audit. Prior to filing for registration for the first time, fran - chisors should consider whether they have issued securities, such as stock or membership interests, to owners or investors in California. Corporations Code Section 25102 (f) exempts certain limited, non-pub - lic offerings from California’s securities qualification
requirement, but generally requires the issuer to file a Limited Offering Exemption Notice (LOEN) within 15 calendar days after the first sale of a security in California. These filings are frequently skipped in the entity formation phase because there is little penalty associated with not filing them; an issuer that discov - ers a missed filing generally has 15 business days to file, subject to a higher fee. DFPI regulators routinely investigate these filings and will require the filing to be completed as part of their comment if they believe any securities were sold in California. 3.3 Consequences of a Failure to Register A franchisor that is required to register and fails to do so violates the CFIL. Any franchisee who did not receive a registered FDD has the right to sue and seek rescission or other damages. If DFPI regulators learn of this, the DFPI will likely initiate an investigation of the franchisor. As part of its investigation, the DFPI typi - cally requests information regarding the franchisor’s offers and sales over the preceding several years. The DFPI usually assesses a civil penalty of USD2,500 for each violation identified, although penalties of up to USD10,000 per violation may be imposed. The DFPI might also order the franchisor to offer rescission to the affected franchisees. The DFPI generally learns of a violation in one of two ways. First, a regulator reviewing a franchise registra - tion application might see in the filed documents, or in their own internet search, that the franchisor has existing business units that seem to be franchised but does not have a prior registration. Often, the regula - tor will ask further questions and request documents related to legal compliance. Second, the DFPI invites consumer complaints and in some instances a fran - chisee who believes they have been harmed by non- compliance will direct a complaint to the DFPI. If the DFPI agrees to investigate such a complaint, it will typically seek information about all franchisees who may have purchased a business when the franchisor was unregistered.
106 FRANCHISING 2026
C HAMBERS.COM
Powered by FlippingBook