California

Registration or Filing Required? Yes, Registration
Business Opportunity Laws? Yes

California is a franchise registration state. So, you must register your FDD with the California Department of Financial Protection and Innovation (DFPI) prior to offering or selling franchises in California. California charges initial franchise registrants a $675 fee. Registrations in California must be renewed annually for a $450 fee, and prior year’s registrations expire 110 days after the end of the franchisor’s fiscal year. More information can be found on the California DFPI Website.

How Do I Know if I Have to Register?

Franchises that are subject to the California Franchise Investment Law, must register in California prior to selling franchises. Franchises are subject to that law when an offer to sell a franchise is made or accepted in California, or where the franchisee is domiciled in the state and the business will be operated in the state.

How do I Register in California?

Your registration in California can be done either by mail, online through the DFPI’s DOCQNET Portal, or through NASAA’s Electronic Filing Depository (for an additional fee). For a franchisor’s initial registration, the franchisor must submit the required documents including:

1. A cover letter providing information about the franchisor, including the franchisor’s fiscal year-end date.
2. The franchisor’s FDD, including the California State Addendum.
3. A Franchise Registration Application Facing Page.
4. A Uniform Consent to Service of Process.
5. A Customer Authorization of Disclosure of Financial Records.
6. Sales Agent Disclosure Forms.
7. Audited financial statements.
8. An Internet Ad Exemption Notice.
9. A Supplemental Information Page.
10. A Guarantee of Performance (if needed).
11. The registration fee of $675.

If you think the fun stops after submitting your registration application in California, you’d be wrong. The application undergoes a thorough review by an examining attorney of the state, and frequently those examiners reply to the application with comments on provisions of the FDD that need change or clarification. You must respond to those comments in order to receive registration. Because of this, the registration process can sometimes take several weeks. Once your franchise is registered, you will receive an Order of Effectiveness which notifies you of the date your California Registration is effective.

Will I Need to File Annual Renewals?

Yes, you must renew your franchise registration annually in California, and you must do so within 110 days after the end of your fiscal year. For your renewal application, you must submit the Franchise Registration Application Facing Page, a Verification/Certification Form, 2 copies of your FDD (one clean and one marked with changes made from the prior FDD), and a renewal fee of $450. If you do not renew your registration before your current registration’s expiration, you will have to file a new initial application for registration.

What if I Make an Amendment to my FDD?

If you make a material amendment to your FDD you must “promptly” file an application to amend your registration. Your amendment application needs to include the Franchise Registration Application Facing Page, a Verification/Certification Form, two copies of your FDD (one clean and one marked with changes made from the prior FDD), and an amendment fee of $50. The DFPI also recommends including a Cover Letter with your amendment application clarifying what change was made to the original application and where they can be found in the registration document on file. What qualifies as a material change can be subjective, and we are more than happy to discuss whether any proposed changes you have would be considered material changes.

Does California Have Financial Assurance Requirements on Top of That?

Yes, after reviewing the financial statements contained in your FDD, the state examiner may require you to agree to one of the following financial assurance requirements if he or she determines you don’t have sufficient capital: (i) deferring the initial franchise fee until your franchisee has opened for business; (ii) escrowing your initial franchise fees; or (iii) posting a bond. You will typically have the option to choose which requirement you prefer. California is also that only state that offers a cash infusion option, and in some cases may require it.

Are There Any Exemptions from Registering in California?

While California requires a significant amount of information for registration, it also provides numerous exemptions from those needing to register. However, the scope of those exemptions is narrow, and most franchise sales will require registration. Factors that may qualify you for exemption include out of state franchise sales, the sophistication or net worth of the franchisee, and fractional franchises (where the new franchise acts as more of an “add on” than a new franchise).

What if I Negotiate Addenda to my Franchise Agreement with Franchisees?

Unlike most registration states, California has ongoing reporting requirements that franchisors must follow, specifically when it comes to negotiating changes to the franchise agreement. In California, a franchisor cannot make negotiated changes to a California franchise agreement unless the franchisor complies with additional notice obligations to the franchisor’s prospective California franchisees. Bottom line is that all future California franchisees must be provided with the terms of all addenda signed by other California franchisees over the previous year. Additionally, the franchisor must provide California with notice of a negotiated change.

Is There Anything Else I Should be Aware of?

Always! Franchises are subject to the California Franchise Relations Act, which generally promulgates stricter requirements related to the termination, nonrenewal, and transfer of franchises between a franchisor, sub franchisor, and franchisee, and has a greater jurisdictional reach than the Franchise Investment Law.

We know, California franchise laws are unique and quite extensive. That being said, California also offers a huge opportunity for most franchisors to grow their businesses, and your friends at Drumm Law are here to help you make the legal side a breeze!

Fun Fact: Despite its name, Death Valley has a surprisingly large amount of life in it!