Interpretive Opinion No. 71 / 31F

State of California Department of Corporations

Anthony R. Pierno, Commissioner
In reply refer to: File No. _____

This interpretive opinion is issued by the Commissioner of Corporations pursuant to section 31510 of the franchise investment law. It is applicable only to the transaction identified in the request therefor, and may not be relied upon in connection with any other transaction.

Mr. Douglas B. Warren
Legal Counsel
Big Boy Restaurant of America
1001 East Colorado Street
Glendale, CA 91209

Dear Mr. Warren:

The request for an expression of our opinion, contained in your letter dated April 26, 1971, as supplemented by your letter dated May 10, 1971, has been considered by the Commissioner. Your letters raise the question whether Big Boy Franchises, Inc., a Delaware corporation ("Big Boy"), under the circumstances described by you, may continue to offer and sell franchises exempt from the registration and disclosure requirements of Section 31110 of the Franchise Investment Law by virtue of Section 31101 of the Law. On the basis of the facts represented in your letters, this question is answered in the negative.

You have represented that Big Boy is 100% owned by Marriott Corporation, a Delaware corporation ("Marriott"); that Big Boy has a net worth according to its most recent financial statement in excess of $1,000,000; that Marriott has a net worth, we assume on a consolidated basis, according to its most recent audited financial statement in excess of $5,000,000; that Big Boy has had at least 25 franchises conducting business, and has itself been conducting a restaurant business for well in excess of five years prior to April, 1971.

Section 31101 of the Franchise Investment Law provides that there shall be exempted from the registration and disclosure requirements of Chapter 2 of Part 2 of the Law, and especially from the registration requirement of Section 31110, the offer and sale of franchises if the standard as to financial condition set forth in Subdivision (a) and the standard as to scope of operation set forth in Subdivision (b) are met, and provided further that the franchisor complies with the disclosure requirements specified in Subdivision (c). Under Subdivision (a), a franchisor is entitled to the exemption if it has a net worth, according to its most recent audited financial statement, of at least $1,000,000, and is at least 80% owned by a corporation with a consolidated net worth of $5,000,000 also established by its most recent audited financial statement.

The facts represented in your letter, as reflected above, satisfy the requirement of' Subdivision (a) except that the net worth of Big Boy, the franchisor, in an amount of not less than $1,000,000, is not established by an audited financial statement. You have represented that the net worth of Big Boy, as shown in its Balance Sheet dated March 14, 1971, is $1,262,756, based upon an unaudited statement prepared by Arthur Anderson as of the fiscal year ending August 2, 1970, in connection with preparation of Marriott's audited financial statement. An audited financial statement of Big Bay will be available no later than September 15, 1971.

In our opinion, Big Boy's financial statement prepared by Arthur Anderson does not meet the requirements of an audited financial statement contained in Section 3110l(a). Rule 100, as you indicated in your letter dated May 10, 1971, clarifies Section 3110l(b), and does not eliminate the requirements of Section 3110l(a). Furthermore, you have not indicated whether Big Boy will make the disclosure requirements specified in Section 3110l(c). For these reasons, the exemption provided in Section 31101 of the Franchise Investment Law is not available for the franchises offered and sold in this state, and therefore. Big Boy may not continue to sell franchises in this state, unless the requirements of Chapter 2 of Part 2 of the Law are met or the requirements for exemption set forth in Section 31101 are complied with.

Rule 100.1 exempts from the registration and disclosure provisions of Section 31110, any offer or sale of a franchise to a resident of a foreign state territory or country who is neither domiciled in California to the knowledge of the seller or actually present in California, if the sale of such franchise is not in violation of any law of the foreign state, territory or country concerned we concur in your opinion that this exemption does not require the written disclosures specified in Section 3110l(c) of the Law. We are also of the opinion that, assuming the requirements of that Rule are met, sales of franchises to foreign corporations not doing business in California are exempt from the registration and disclosure requirements of Section 31110, even though the corporations may have shareholders in California, by virtue of Rule 100.1.

Dated: San Francisco California
May 27, 1971

By order of
ANTHONY R. PIERNO
Commissioner of Corporations

_______________________
JAMES L. KELLY
Chief Deputy Commissioner