DEAR FRANNY: When I researched a franchisor using California's online database Caleasi to access free franchise disclosure documents, I discovered that the company filed a Section 31101 Exemption in March of 2009 that allows their franchise related information to remain undisclosed.

I wondered if this serves as any sort of flag - positive, negative, nada. As I understand it, the franchisor has fifteen months from that filing to file the standard disclosure reports, which the franchisor dutifully filed for many years before 2009. All information I received from the franchisor has been biased towards selling franchises, which I expect and respect. Naturally, I am biased towards getting the best value from whatever franchise I end up with. Could you explain the 31101 exemption in short and simple words? – Y. HIDE

DEAR Y: To answer your question regarding a 31101 exemption filing by a franchisor being "positive, negative, or nada" - it really "depends" on who you ask. My answer isn’t short but hopefully you'll find the explanation simple.

First, I'd like to commend you on utilizing the free information available online for your preliminary research and initial due diligence prior to investing in a franchise opportunity. Since you've already utilized the free California based database (CALEASI), you might be interested to know that our Foundation (OpenFran) has indexed thousands of CALEASI and other franchise related public documents (including FDD’s from some exempt franchisors) and made them word searchable and downloadable - for free.

Here is your answer:  A franchisor who files a 31101 exemption in the State of California is claiming to meet a variety of requirements, including:

•     Minimum net worth of the franchisor or corporate parent;
•     5+ years of sustained operational experience (minimum number of franchises, etc.)
•     Agreement to disclose material changes in a timely fashion.

33101 is known as the "Large Franchisor" exemption. It is our understanding that California enacted the 33101 exemption as a way to reduce regulation and associated expenses. A note: According to various state offices where disclosure filings are required (Disclosure States), it actually costs the state more to review and process a disclosure filing than what they charge franchisors in fees.

The "Franchise Investment Law" (FIL), accompanying regulations and NASAA rules were designed to protect potential "unsophisticated" franchise investors while also protecting legitimate franchisors and franchising in general from unscrupulous operators. The logic behind the 33101 exemption is that larger, financially secure and experienced franchisors are more likely to provide a stable investment/business opportunity to citizens, thus requiring less oversight.

However, some franchising industry pundits claim that the exemption is counterintuitive to the stated purpose of the FIL disclosure rules and other regulations since it allows these "large" private franchisors, which have greater disproportionate financial advantage over individual franchisees/investors, avoid open, public disclosure of their practices, agreement terms, legal proceedings and ongoing financial condition. Hence, it could be suggested that a large, private franchisor has less investment regulation, oversight, and public disclosure requirements than pretty much any investment opportunity in The United States.

Many of those franchisors who cannot be exempted (franchisors must meet all the criteria of 31101) believe the exemption is unfair since it places additional financial burdens on them via higher attorney expenses and the filing fee structure (the exemption filing and annual maintenance fees are substantially less than disclosure filing fees in most registration states).  The logic is that bigger franchisors should pay their proportionate share.

Looking at Blue Maumau, you will see that a large number of disputes discussed on the site involve exempt franchisors.  “Franchisee-side” groups, including Independent Franchisee Associations (IndFA's), argue that the bigger, more powerful, and more complex the franchisor, the larger the opportunity for abuse and heavy-handed dealings.

So, “positive or negative” is in the eye of the beholder.

Ultimately, a UFOC/FDD is a standardized public disclosure document that must be provided to the franchisee before any franchise agreement is signed and these large franchisors do commit to communicating material changes on an ongoing basis. Franchisors also claim that they will send their FDD to anyone who requests it without any strings. But there are no rules that require this practice.

It can be argued that these exemptions increase opacity and decrease unfettered access to timely information to interested parties. Those looking to research an investment without having to pay to attend “Discovery Days” or purchase an FDD will naturally have a harder time locating information and conducting due diligence for one of these large franchise opportunities versus a franchisor who is required to publicly file and disclose their FDD. The same goes for an existing franchisee who wishes to proactively educate themselves on the latest dealings and financial condition of their franchisor.

Reference: http://law.onecle.com/california/corporations/31101.html

About the author: Dear Franny is authored this time by Susan Maizner, executive director of The Open Franchise Foundation, a 501(c)(3) organization. Formed to promote unfettered access to franchising related documents, such as the UFOC and FDD, the foundation is entirely funded by the generous support of benefactors and franchise community members. Together we advocate franchise openness and equal access to information. OpenFran.org provides free access to every franchising related document archived by CALEASI since 2002, along with 1000s of other franchising related documents (UFOCs, FDDs, filings, exhibits, orders, etc.). These documents, formerly viewable only as simple images, have every word fully indexed, allowing you to instantly find what you need free of charge. Every archived document is also easily downloadable in the convenient PDF standard. Ms. Maizner can be reached at 480-264-0050. Or email her at info@openfran.org. Visit them at http://www.openfran.org

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