3.2.1 California

Fees

*Renewal filings must be submitted prior to the current registration’s expiration or California will require the filing be resubmitted as a new initial filing with payment of the initial fee.

**Post-Effective Amendment filings must be submitted if you are making a material change to your FDD after your initial or renewal filing is approved.  Pre-Effective Amendment filings are submitted if you are making a material change to your FDD but your initial filing or renewal filing is not yet approved.  No further sales may be made in California until the amended FDD is approved and the registration is effectively amended.

Notes

• All California filings are submitted online and the filing fees are paid to the state via credit card. You will be required to complete and submit a credit card authorization form to us before we will submit the filing for you.
• The California application required for each filing must be notarized.
• If you are in your first year of franchising, California will accept Reviewed financials instead of audited. The state may also require the submission of unaudited financials to supplement the reviewed or audited financials in certain circumstances.
• After your California renewal filing has been submitted, we will make your newly issued FDD available on your Map for disclosures. The FDD will contain a cover sheet which will explain that while the FDD has been filed with the State of California, it has not yet been approved by the State of California.  No deals may be closed in California until the renewal filing is approved, and all California prospects must be redisclosed with the approved FDD.
• Advertising – Any advertising that will be used by you to target prospects in California or will be published and used only in California, must be filed with the state at least three days prior to its first use. If we do not receive a comment or response from the state on the filing in those three days, you are free to use the advertising.
• Financial Assurance – If the Commissioner deems you to not have adequate funding to fulfill all your pre-opening obligations to a franchisee, they will require some form of financial assurance be instituted, such as an escrow, impoundment or deferral of initial fees, or the posting of a surety bond.

Exemptions (from registration with the state and/or from disclosure with a specific prospect)

• Large Franchisors – exemption from registration only
  • Two criteria must be met:
    1. Net Worth – must meet one of the following criteria per your last fiscal year end’s audited financials:
       • net worth on a consolidated basis of at least $5,000,000;
       • net worth of at least $1,000,000 and your owner’s net worth is at least $5,000,000; or
       • net worth of at least $1,000,000 according to your unaudited financials, your owner has a net worth on a consolidated basis of at least $5,000,000 according to its audited financials, and your owner “absolutely and unconditionally guarantees to assume [your] duties and obligations”.
    2. Experience – must meet one or more, or a combination, of the following conditions for the immediately preceding five-year period:
       • You have had at least 25 franchisees open and operating;
       • You have owned and operated a business that is the same as the business being franchised;
       • Your owner has had at least 25 franchisees open and operating businesses of the type being franchised; or
       • Your owner has owned and operated a business that is the same as the business being franchised.
  • We will file a California Notice of Exemption with the state before you can offer and sell a franchise. The exemption is effective upon filing and is then available for multiple transactions during the calendar year of its filing.
  • Fees:
    

    $450	Initial Notice
    $150	Renewal Notice*

    *Renewal notices must be filed in consecutive years, or a new initial notice filing must be submitted instead.

• Large Franchisee – exemption from registration and disclosure
  • Six criteria must be met
    1. Each prospect must fall within one of the following categories:
       • Must be a partner, officer, member, etc. of yours
       • Must be an entity with total assets greater than $5,000,000 per most recent financial statements
       • Must be an individual with net worth of at least $1,000,000, excluding residence, pension/retirement accounts, home furnishings and automobiles
       • Must be an individual with at least $300,000 gross income for previous two years or joint gross income with spouse of at least $500,000 for previous two years
       • Must be an entity where all owners meet the criteria of at least one of the prior four bullet points
    2. Each prospect must have enough knowledge and experience in business and financial matters according to your reasonable belief.
    3. Each prospect must intend to conduct the business of franchise for itself and not for resale.
    4. If the prospect is an individual, the initial payment required must not exceed 10% of his/her net worth, excluding residence, pension/retirement accounts, home furnishings and automobiles.
    5. You must file for exemption to apply
    6. You will not assist in the sale
  • We will file a California Notice of Exemption with the state before you can offer and sell a franchise. The exemption is effective upon filing and is then available for multiple transactions during the calendar year of its filing.
  • Fees:
    

    $450	Initial Notice
    $150	Renewal Notice*

    *Renewal notices must be filed in consecutive years, or a new initial notice filing must be submitted instead.

• Fractional Franchises – exemption from registration and disclosure
  • Where a franchisee prospect will be adding your product or service to an existing business, all of the following must be met:
    • Experience – prospect must have been engaged in similar business for at least the prior 24 months
    • Your product or service must be “substantially” similar to prospect’s current business
    • The franchised business will be operated at the same premises as prospect’s current business
    • Sales resulting from the franchised business will not exceed 20% of total annuals sales by franchisee
    • Franchisee prospect cannot be controlled by you
    • You file for exemption and pay fee
  • We will file a California Notice of Exemption with the state before you can offer and sell a franchise. The exemption is effective upon filing and is then available for multiple transactions during the calendar year of its filing.
  • Fees:
    

    $450	Initial Notice
    $150	Renewal Notice*

    *Renewal notices must be filed in consecutive years, or a new initial notice filing must be submitted instead.

• Insiders Exemption – exemption from registration and disclosure
  • Applies to a franchise sale to franchisee employed (as officer, director, managing agent, owner) by you within prior 60 days and for at least 24 months
  • We must file a California Notice of Exemption with the state within 15 calendar days after the sale.
  • Fees:
    

    $450	Initial Notice
    $150	Consecutive Subsequent Filings

• Sales to Existing Franchisees – exemption from registration and disclosure
  • Franchisee must have been open and operating another franchised business for at least 24 months
  • We must file a California Notice of Exemption with the state within 15 calendar days after the sale.
  • Fees
    

    $450	Initial Notice
    $150	Consecutive Subsequent Filings

• Renewal of an Existing Agreement – exemption from registration and disclosure
  • Exemption applies if the operation of the franchised business was uninterrupted and no material change will be made to the franchised business
  • No filing and fees are required under this exemption.

• Sales by Existing Franchisees – exemption from registration and disclosure
  • Applies if franchisee is selling the franchised business and the sale is not “effected by or through the franchisor.” [Please contact your Spadea legal team for further guidance on the application of this exemption.]
  • No filing and fees are required under this exemption.

• Out-of-State Sales – exemption from registration and disclosure
  • All of the following criteria must be met:
    • Prospect is resident of another state or foreign country
    • The franchised business and all business it conducts with its customers will take place, and all customers are located, outside of California
  • No filing and fees are required under this exemption.

• Negotiated Sales
  • There are two types of exemptions here:
    (I) is an exemption from both registration and disclosure, but we must file a franchise renewal application with California and we must file a certification that you have complied with the following requirements:
    • The registered FDD must be used in the offer
    • The prospect must receive all that follow:
      1. description of each negotiated term in California during previous 12 months
      2. within five business days, a statement that copies of all negotiated terms are available if requested
      3. name, phone, and address to whom the request must be made
    • You certify your compliance with these criteria at renewal
    • The negotiated terms provide additional benefits to the prospect franchisee
    • Copies of the material negotiated terms must be kept for five years and supplied to Commissioner of Financial Protection and Innovation as requested

    (II) is an exemption from registration of the negotiated change only, and we must file a Notice of Negotiated Sales within 15 business days after the negotiated sale.  Additionally, before selling another franchise in California, we must also file an amendment to your registration to disclose the items that were negotiated and you must pay a $50 filing fee.  This amendment is automatically effective.  [In general, the first exemption is preferred by franchisors, but you should speak with your Spadea legal team regarding which exemption applies in your situation.]

• Experienced Franchisee – exemption from registration and disclosure
  • Exemption applies when the prospect has had at least 24 months experience in the financial and operational aspects of a business “substantially similar” to a franchised business, and when the experience has occurred within seven years of the sale
  • We must file a California Notice of Exemption with the state within 15 calendar days after the sale.
  • Fees:
    

    $450	Initial Notice
    $150	Consecutive Subsequent Filings

• Modifications to Existing Franchise Agreements – exemption from registration and disclosure
  • There are two types of exemptions here:
    (I) Not System-Wide – exemption applies if all the following are met:
    • Franchisee receives written modification at least five business days prior to any signing and signing does not occur within 12 months of the effective date of the Franchise Agreement
    • One of the following applies:
      1. proposed modification is made due to a resolution of a dispute between you and franchisee and is offered voluntarily to less than 25% of California franchisees in any 12 months
      2. proposed modification is offered voluntarily to less than 25% of California franchisees in any 12 months and franchisee has right to rescind

    (II) No Adverse Impact to Franchisee Rights – exemption applies if modification is offered voluntarily and does not adversely impact the franchisee’s rights

    • No filing and fees are required under this exemption.

• Non-Franchisor Exemptions – The following exemptions are for atypical franchise offerings, are very rare, and in general, will not apply to you if you are an active franchisor with an FDD.
  • Co-ops
  • Nominal Fee
  • Bank Credit Card Plans
  • Petroleum Wholesalers