Commissioner's Opinion No. 72 / 14F

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. Kenneth M. Lapine
Shaker Savings Association
20133 Farnsleigh Road
Shaker Heights, OH 44122

Dear Mr. Lapine:

The request for an interpretive opinion contained in your letter dated December 13, 1972, has been considered by the Commissioner. Your letter raises the question whether the license agreements between Savers Clubs of America, Inc. {"Savers" ), a wholly-owned subsidiary of Shaker Savings Association, an Ohio-chartered savings and loan association ("Shaker"), is exempt from the registration requirement of Section 31110 of the Franchise Investment Law by virtue of Section 31101 of that Law. On the assumptions stated below, this question is answered in the affirmative.

You have represented that in 1968 Shaker began and developed a marketing program built around a "club" for persons who opened savings accounts having balances of $1,000 or more, or who opened an account with $25 and agreed to systematically deposit $25 a month therein until a balance of $1,000 has been attained. In 1969, savers was organized by Shaker for the purpose of granting licenses to other financial institutions to operate "Savers Clubs." Members are entitled to receive special discounts on travel, merchandise and services from community merchants, about which they are informed through a quarterly publication known as "The Compass," which is also a trademark of Savers. At the present time, 18 financial institutions hold licenses to operate Savers Clubs in their trading area and Savers contemplates granting licenses to California savings and loan associations.

You have further represented that, in addition to the right to use the trademarks and trade name of Savers, a licensee is entitled to a complete written manual which includes introductory materials and supplies; has free access to advertising used by other licensees; and is given sample forms, organizational documents, relevant government rulings, travel regulations and suggested employee orientation program ideas. A Savers representative spends several day at the licensee's office assisting in the establishment of its Savers Club and in the solicitation of local benefits. Savers coordinates the activities of the licensees and publishes "The Compass" which is distributed free to all members.

The licensee is required to meet certain minimum standards relating to promotion of its Savers Club, including the publication of a club magazine in the format and containing the information and material supplied by Savers, together with local supplements approved by Savers. The license fee presently ranges between $5,000 and $40,000, depending upon the prospective licensee's asset size and the population in his market area. In addition to the initial license fee, the licensee is required to pay a quarterly amount equal to $25 per 1,000 members of his Savers Club.

We understand you to express the opinion that the above described license agreement is a "franchise" within the definition of Section 31005 of the Franchise Investment Law and request our opinion as to whether the offer and sale thereof in this state is exempt from the registration requirement imposed by Section 31110 by virtue of Section 31101. That Section provides that there shall be exempt from the disclosure and registration requirement of Chapter 2 of Part 2 of the Law, and especially the registration requirement of Section 31110, the offer and sale of a franchise if the standard as to financial condition set forth in subdivision (a) and the standard as to scope of operations set forth in subdivision (b) of that Section are met, and, provided further, that the franchisor complies with the disclosure requirement's specified in subdivision (c) of that Section.

In this connection you have represented that Savers and Shaker have a net worth, on a consolidated basis, according to the most recent audited financial statements dated December 31, 1971, in excess of $18,000,000. We assume, and expressly predicate our opinion on the assumption, that the most recent audited financial statements of Shaker and Savers will reflect a net worth of not less than $5,000,000 and a net worth of not less than $1,000,000, respectively.

You have further represented that Savers will disclose in writing to each prospective licensee, at least 48 hours prior to the execution of the license agreement and receipt of any consideration, the information required by Section 31101(c). In this connection, please understand that we express no opinion with regard to the "disclosure statement" enclosed with your letter since we do not have sufficient information to determine its accuracy nor would such a determination be appropriate in an interpretive opinion.

With regard to the standard as to scope of operations set forth in subdivision (b) of Section 31011, Rule 310.100 provides that that standard is satisfied if any corporation owning at least 80% of the franchisor has conducted business which is the subject of the franchise throughout the five year period immediately preceding the offer and sale of the franchise. In this connection, you have represented that Savers is a wholly-owned subsidiary of Shaker which has conducted business which is the subject of the franchise (the attraction and promotion of savings deposits and the opening of new savings accounts for not less than five years preceding the offer and sale of franchises in California.

Accordingly, it is our opinion that, under the circumstances described in your letter and assumed by you as outlined above, the offer and sale of license agreements by Savers to financial institutions in California is exempt from the registration requirement of Section 31110 of the Franchise Investment Law by virtue of Section 31101, as long as the standard as to financial condition set forth in subdivision (a) and the standard as to scope of operations set forth in subdivision (b) of said Section are met.

The Franchise Investment Law contains no exemption based upon the fact that sales are limited to financial institutions of substantial asset size or that Savers' licenses for the use of a marketing plan or program do not involve the sale of merchandise and do not require a "substantial investment on the part of the licensee." The only exemption based upon the amount required to be paid by the franchisee is that provided by Rule 011 for the offer and sale of a franchise which would be subject to registration solely because the franchisee is required to pay, directly or indirectly, a franchise fee which on an annual basis does not exceed the sum of $100.

Dated: San Francisco, California
March 21, 1973

By order of
BRIAN R. VAN CAMP
Commissioner of Corporations

By __________________
J. DOMINIQUE OLCOMENDY
Supervising Corporations Counsel
Office of Policy