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Sandbox mode Modern and Custom games allow the ability to expand the top-level league (i.e. the NHL in modern mode.) Historical mode also has expansion, but it's limited to actual historical expansions and not under your control.
You can choose to expand in any year, but you must do it either on the first day of the game (before advancing the game) or on July 1, the starting date of each new season. To expand, go to the League >> Edit screen, and click on the Expand League button. This will open up the expansion wizard, where you can enter the details of the new teams (you must bring in an even number of teams.)
After you've finished creating your teams, an expansion draft will be scheduled. Existing teams must submit a protected list of players, and any non-protected eligible player is eligible for selection. This includes the rights to players if they are currently restricted free agents. The rules on who must be protected roughly conform to the NHL's practices with the last few expansion drafts. (Unfortunately, due to the timing of expansion in the game, you'll miss the entry draft because it was held in June. As compensation, the expansion draft goes a few rounds longer than it normally would, allowing you to take more players.)
If you're playing in a regular league, matching expansion teams will be created in the AHL and ECHL to serve as the top and second-level farm teams for your NHL teams. In fictional mode, the expansion teams will use the reserve list system.