Interpretive Opinion No. 71 / 51F

State of California Department of Corporations

Brian R. Van Camp, 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. Gerald T. Grenert
Attorney at Law
15910 Ventura Boulevard
Encino, CA 91316

Dear Mr. Grenert:

The request for an expression of our opinion contained in your letter dated September 8, 1971, has been considered by the Commissioner. In this letter you have raised the question whether the arrangements between Jewelart Inc., a California corporation ( "Jewelart" ), and persons referred to by you and hereinbelow as "dealers", are franchises within the meaning of Section 31005 of the Franchise Investment Law, assuming that the dealers do not pay any continuing service fee and/or royalty.

From your letters dated August 2, 1971 and August 31, 1971, to which we responded with our letters dated August 26, 1971 and September 13, 1971 respectively, it appears that Jewelart is engaged in the sale of components for costume jewelry to consumers interested in creating the end product at home from these components. We understand that by the arrangements in question, Jewelart authorizes dealers pursuant to a formal agreement, labeled a "Franchise Agreement", to operate a store for the sale of such jewelry components at retail.

Inasmuch,as in your letters dated August 2, 1971 and August 31, 1971, you requested us to base our opinion on the assumption that Jewelart would collect a continuing service fee of 1% of the dealer's gross sales (excluding taxes), we expressed the opinion in our responding letters that such service fee would constitute a "franchise fee" within the meaning of Section 31011 and subject the arrangements between Jewelart and the dealers to the provisions of the Franchise Investment Law, including the registration requirement of Section 31110, assuming, of course that other elements essential under Section 31005 for the definition of "franchise", were present. In your letter dated September 8, 1971, you have now requested us to assume that the dealers will not be required to pay a continuing service fee and/or a royalty, and we understand from your letter dated August 2, 1971, that they are not required to pay what you have referred to as a "front-end fee".

Assuming, therefore, for the purpose of the instant opinion that the dealers are not required to make any payment to Jewelart other than on account of merchandise furnished to them, and further assuming that the price charged by Jewelart to the dealers does not exceed the bona fide wholesale price of such merchandise, we are of the opinion, previously indicated in our letter dated August 26, 1971, that the arrangements between Jewelart and the dealers are not franchises within the definition of Section 31005 of the Franchise Investment Law, because the element of a franchise fee, essential to that definition, is lacking.

As stated in our letter dated August 26, 1971, the purchase or agreement to purchase goods at a bona fide wholesale price is not considered the payment of a "franchise fee" pursuant to Section 31011(a), and Rule 011 of the Commissioner exempts from the registration requirement of Section 31110 of the Law, any offer or sale of a franchise which would be subject to registration solely because the franchisee purchases or agrees to purchase goods at a price other than the bona fide wholesale price, if the total payment in excess of the bona fide wholesale price computed on an annual basis does not exceed $100.

Dated: San Francisco California
September 24, 1971

By order of
BRIAN R. VAN CAMP
Commissioner of Corporations

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HANS A. MATTES
Assistant Commissioner
Office of Policy