Commissioner's Opinion No. 72 / 35F

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.

The request for an interpretive opinion contained in your letter dated September 21, 1972, as supplemented by your letter dated October 6 , 1972, has been considered by the Commissioner. To your letters you have raised the question whether the offer and sale by x of rent-a-car franchises, under the circumstances described by you, is subject to that registration requirement of Section 31110 of the Franchise Investment Law. On the assumptions stated below, this question is answered in the negative.

You have represented that x operates certain of their motels on an ownership basis and others on a franchise basis. We furthermore understand you to represent, and we shall assume for the purpose of this opinion, that X has had at least 25 franchisees conducting motel businesses at all times during the five-year period immediately preceding the proposed offer and sale of rent-a-car franchises, and that with respect to the offer and sale of motel franchises, it is entitled to the exemption of Section 31101 from the registration requirement of Section 31110. The question raised by you is whether the exemption is also available to X for the offer and sale of franchises to operate a rental car business. You have represented that the operation. of such business will be an incident of the motel business.

The rationale for the exemption of Section 31101(a) is that the abuses described in Section 31001 of the Law will be avoided in the sale of franchises by persons having the business experience described in Subdivision (b) of Section 31101 and the financial responsibility specified in Subdivision (a), and who make the disclosures called for in Subdivision (c). The business experience requirement of Subdivision (b) is satisfied if the would-be franchisor "has had at least 25 franchisees conducting business at all times during the five-year period immediately preceding the offer or sale; or has conducted business which is the subject of the franchise continuously for not less than five years preceding the offer or sale". x does not claim the exemption by virtue of compliance with the latter alternative, five years conduct of the rent-a-car business which is the subject of the proposed franchises. Conduct of a business other than that to be franchised is not compliance with Subdivision (b) whether construed literally or with a view to the rationale stated above.

As regards the other alternative of Subdivision (b) that the franchisor have had at least 25 franchisees conducting business at all times during the five-year period immediately preceding the proposed offer or sale of franchises, we assume, as stated above stated, that X during that period of time has had at least 25 franchisees conducting motel businesses. The wording used by the Legislature does not appear to limit the exemption to franchisors who have had 25 franchisees conducting the identical business for which the franchisor proposes to offer and sell franchises. Also it is reasonable to assume that the Legislature with a view to its objective, considered five years experience in the granting of any franchises's a sufficient basis for the exemption, provided of course that the requirements of Subdivisions (a) and (c) are also satisfied. Moreover, in support of this conclusion, one might point to the emasculation of the exemption which would have resulted, had the Legislature predicated it on experience in the granting of identical franchises, and the uncertainty which would have been created by a requirement of five years experience in the granting of franchises similar to those for which the exemption is sought. Your representation that the operation of the rent-a-car business will be an incident of the motel business, for which you have advised us x is entitled to sell franchises under the exemption, lends additional though perhaps unnecessary support to our conclusion that x satisfies the five-year experience requirement of subdivision (b) of Section 31101 with respect to the offer and sale of rent-a-car franchises.

Therefore if x at the time of the offer and sale meets the factual prerequisites set forth in Subdivisions (a) and (c) of Section 31101, it is our opinion that under the circumstances described by you, the exemption of Section 31101 is available to it for the proposed offer and sale of rent-a-car franchises.

Dated: San Francisco, California
October 26, 1972

By order of
BRIAN R. VAN CAMP
Commissioner of Corporations

By __________________
HANS A. MATTES
Assistant Commissioner
Office of Policy