Commissioner's Opinion No. 73 / 19F

State of California Department of Corporations

Brian R. Van Camp, Commissioner
In reply refer to: File No. _____

This letter is not an Interpretive Opinion for the reasons stated below.

Mr. Richard F. Davis
Attorney at Law
Dolman, Kaplan, Neiter & Hart
1901 Avenue of the Stars
Suite 460
Century City
Los Angeles, CA 90067

Dear Mr. Davis:

The request for an interpretive opinion, contained in your letter dated April 9, 1973, has been considered by the Commissioner. Your letter raises the question whether the offer or sale of franchises by Taco Bell, a California corporation ( "Taco" ), under the circumstances described by you, is exempt from the certification requirement of Section 31110 of the Franchise Investment Law.

You have represented that Taco has operated Taco restaurants continually since 1962 and has granted franchises for Taco restaurants since 1965. In 1971 and 1972, Taco registered its franchises under the Franchise Investment Law. Its current registration will expire in June, 1973. At the present time, Taco does not offer or sell any franchises to persons other than pre-existing franchisees or "high-level employees".

Section 31110 of the Franchise Investment Law imposes a registration requirement on any person offering or selling franchises in this state on or after April 15, 1971, unless an exemption is available. We understand you to suggest that the offer and sale of Taco franchises should be exempt from the. registration requirement of Section 31110 of the Law by virtue of Section 31101. That Section provides that there shall be exempted from the disclosure and registration requirements of Chapter 2 of Part 2 of the law, and, especially from the registration requirement of Section.31110, the offer and sale of a franchise if the standard as to financial condition as set forth in Subdivision (a) and the standard as to scope of operations set forth in Subdivision (b) of the Section are met, and, provided further, that the franchisor complies with the disclosure requirements specified in Subdivision (c) of the Section.

In this connection, you have represented that Taco has a net worth in excess of $5,000,000 according to its most recent audited financial statement and that it has had at least 25 franchisees conducting business at all times during the past 5 years. However, you indicated that Taco desires to avoid providing documents and information specified in Subdivision (c) of Section 31101 and have expressed the opinion that this material is unnecessary since the purchasers will have a pre-existing relationship with Taco. In our opinion, the requirements of Section 31101, especially since they are conjunctively joined, must all be met in order for the exemption provided by that Section to be available. Accordingly, Taco must comply with the disclosure requirements of Subdivision (c) of Section 31101, for the offer and sale of its franchises to be exempt from the registration requirement of Section 31110 by virtue of that Section.

As indicated above, you have represented that the offer and sale of Taco franchises will be limited to pre-existing franchisees and "high-level employees". As regards the offer and sale to pre-existing franchisees, we call your attention to Section 31018 of the Law which excludes from the term "sale" as defined in Section 31018(a) and "offer" as defined in Section 31018 (b) , the renewal or extension of an existing franchise, where there is no interruption in the operation of the franchised business by the franchisee. In this connection, as stated in Comm. Op. No. 72/l5F, if a franchise previously granted is to be changed in relation to its material terms with the result that, in effect, a new franchise is created, the registration requirement of Section 31110, in our opinion, is applicable. Whether the change is a material change for the purpose of the application of Section 31110, in the opinion of the Commissioner must be determined from case to case with a view to the effect which the change has on the rights and obligations of the parties to the agreement and considering their ability to evaluate the consequences of the change. Normally, a change of the parties to the agreement or of the location at which the franchisee's business is operated, is one of the material changes activating the registration requirement. A change in the fee schedule, depending on the circumstances, also may well be so significant as to call for registration of the changed agreement.

In our opinion, the same principle is applicable when a new franchise is to be sold to a pre-existing franchisee, namely, that the registration requirement of Section 31110 is applicable.

As regards the offer and sale of franchises to persons having a pre-existing relationship with the. franchisee, as stated in Policy Letter 45F and reaffirmed in Comm. Op. No. 73/12F, neither the Law nor the rules promulgated thereunder by the Commissioner provide an exemption for offers or sales of franchises based upon a prior relationship between the franchisor and the proposed franchisee.

Dated: San Francisco, California
May 18, 1973

By order of
BRIAN R. VAN CAMP
Commissioner of Corporations

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