Franchise Regulation under the California Corporate Securities Law

Franchising is one of the fastest growing facets of business in the United States. It has become one of the most successful marketing devices in the contemporary commercial world, accounting for $65 billion annually–over 10 percent of the gross national product. Credit for the tremendous growth of the franchising business has been attributed to the fact that it readily melds the know-how of big businessmen with the ambition of little businessmen. The franchise system has the advantage of enabling numerous groups of individuals with small capital to become entrepreneurs. Such a system makes independent businessmen out of people who would otherwise be employees of a vast chain store network. This effect is generally good for the economy; however, as can be expected, where experienced businessmen deal with the unsophisticated, individual hardship often results. One author, in describing business has more than its share of bunco schemes. The California Commissioner of Corporations was concerned with this same general problem when, in June of 1967, he requested advice from the California attorney General concerning the applicability of the California Corporate Securities Law to franchise agreements. The Attorney General concluded that franchise agreements, under appropriate circumstances, would constitute a security, and in these cases create circumstances, would constitute a security, and in these cases would be governed b the Corporate Securities Law. Pursuant to this opinion, the Corporations Commissioner published a bulletin containing guidelines to be considered in examining franchise agreements. In analyzing both the Attorney General’s conclusion and the Commissioner’s expansion of it, the basic premise that franchise agreements will be properly governed by the provisions of the Corporate Securities Law will not be questioned. Rather, attention will center upon the method of application of the Blue Sky Law to these agreements. The Attorney General’s opinion will first be placed in historical context, emphasizing investment contracts. The opinion will then be analyzed as to its effect on franchise agreements. ?This will be followed by (1) a discussion of problems implicit in the approach taken by the Attorney General and the Corporations Commissioner; and (2) a suggested modification of this approach, which is intended to facilitate reasonable control of franchise agreements under the Blue Sky Law consistent with judicial history and interpretation of legislative intent