Business Law

Opinion No. 72 / 14F

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. Bertrand M. Lanchner, Secretary
Videorecord Corporation of America
Videorecord Building
Westport, CO 06880

Dear Mr. Lanchner:

The request for an interpretive opinion contained in your letter dated February 9, 1972, has been considered by the Commissioner. Your letter raises the question whether the receipt of deposits by Videorecord Corporation of America (“Videorecord”) from prospective franchisees, under-the circumstances described by you, constitute the “receipt of any consideration” within the meaning of Section 31119 of the California Franchise Investment Law. This question is answered in the affirmative.

We understand that the registration of Videorecord’s franchises under the California Franchise Investment Law has become effective on or about November 1, 1971, and that Videorecord in accordance with such registration has been offering franchises for sale in California. You have represented that as an integral part of the qualification of applicants to become Videorecord dealers, which we take to mean franchisees, Videorecord has requested a so-called “escrow deposit” of approximately $1,000 from prospective franchisees.

You have moreover represented that the deposit serves as a tool by which Videorecord is able to determine whether an individual is earnestly interested in purchasing a franchise, so as not to taste time and effort analyzing individuals who have no sincere desire to make such purchase. The deposit is fully refundable at any time for any or no reason. You have stated that during the past year Videorecord has received many deposits from individuals throughout the United States and has in every instance returned such deposits immediately upon oral or written request of the individual concerned.

Section 31119 of the Franchise Investment Law requires franchisors of franchises subject to registration in California, to provide “the prospective franchisee at least 48 hours prior to the execution by the prospective franchisee of any binding franchise or other agreement, or at least 48 hours prior to the receipt of any consideration, whichever occurs first, a copy of the prospectus, together with a copy of all proposed agreements relating to the sale of the franchise”.

The Section imposes this requirement, whether or not the consideration received by the franchisor is refundable, regardless of whether it is designated a “deposit” or given some other designation, and regardless of the motivation leading the franchisor to request the payment. The obvious reason for the requirement is “the intent of this law to provide each prospective franchisee with the information necessary to make an intelligent decision regarding franchises being offered” (Sec. 31001, para. 2). Prospective franchisees who without such information would part with any consideration, refundable or not, and for whatever reason requested by the prospective franchisor, might be prejudiced if later on when full information concerning the franchise is conveyed-to them, the franchisor should be unwilling or unable to refund the payment.

While this hazard may be minimal or nonexistent in the case of Video record, the requirement of section 31119 that prospective franchisees be provided with a copy of the prospectus and all proposed agreements relating to the sale of the franchise at least 48 hours before any consideration is received by the prospective franchisor is of general application, and is applicable to Videorecord assuming that the franchises offered and sold by it in California are subject to registration in this state.

We are therefore of the opinion, that the receipt of refundable deposits constitutes the receipt of “consideration” within the meaning of Section 31119 of the Law, and Videorecord therefore at least 48 hours prior to such receipt must provide a prospective franchisee a copy of the prospectus, together with a copy of all proposed agreements relating to the sale of the franchise.

Inasmuch as interpretive opinions are issued for the principal purpose of providing a procedure by which members of the public can protect themselves against liability for acts done or omitted in good faith in reliance upon the administrative determination under the Corporate Securities Law made in the opinion, and since there can be no such reliance where the Commissioner asserts jurisdiction with respect to a particular situation or determines that a legal requirement is applicable, advice to that effect, as contained in this letter, does not constitute an interpretive opinion.

Dated: San Francisco, California
April 18, 1972

By order of 
Commissioner of Corporations

By __________________ 
Assistant Commissioner
Office of Policy

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