Franchise Sales Compliance Matthew J. Kreutzer, Esq., Partner
Laws Relating to Franchise Sales Disclosure Laws: Require franchisors to prepare a Franchise Disclosure Document and provide that document to prospective franchisees before a sale Registration Laws: Before a franchisor can offer or sell, it must file its FDD with the applicable regulatory authority and become registered. Business Opportunity Laws: A hybrid of registration and disclosure laws, most sweep broadly enough to apply to franchises
Federal Franchise Law FTC s Franchise Rule : Must furnish Franchise Disclosure Document to all prospective franchisees 14 calendar days before selling a franchise Must update your FDD within 120 days following the end of your fiscal year. Remember obligation to disclose material changes through amendment Until the entire FDD has been updated and includes the new financials, you must STOP ALL SALES ACTIVITY IN THE COUNTRY. Disclosure law only. There is NO national registration requirement
State Franchise Laws Fourteen states have disclosure and registration laws. Registration must be renewed annually; depending on state, expires between 90 and 120 days of franchisor s fiscal year end Some states grant registration for a 12 month period, some tie registration period to the franchisor s fiscal year end. Must amend registration where material change to information has occurred If the registration has not been renewed, you must STOP ALL SALES ACTIVITY WITHIN THE STATE. Oregon has a disclosure law but not a registration law
Business Opportunity Laws Federal Business Opportunity Law exempts businesses in compliance with the Franchise Rule State Business Opportunity Laws most states automatically exempt franchises In Connecticut, Florida*, Kentucky, Iowa, Nebraska, Texas, and Utah*, you must file a notice of exemption Connecticut, Maine, North Carolina, and South Carolina exempt only where your trademark is registered with USPTO *Must file notice annually
Timing FDD must be given 14 calendar days before signing binding agreement or accepting payment Upon reasonable request, must furnish a disclosure document to a prospect earlier in the sales process than 14 calendar days When in doubt, give it out Begin counting on day after date on receipt Registration states are mostly same. Exceptions: New York and Rhode Island: first personal meeting / 10 business days Michigan, Oregon, and Washington: 10 business days
Timing (continued) 7 calendar day re-disclosure duty for material changes to franchise agreement initiated by the franchisor Send revised franchise agreement with redline or other notation showing changes from the version included with FDD Franchisee has 7 additional days to make up his / her mind Does not apply to negotiated sales initiated by franchisee Except when the negotiated changes are not, on the whole, favorable to the prospect. As a result, where there is give and take between parties in revised document, safer to follow the 7 day redisclosure rule.
Method of Transmission Electronic disclosure is encouraged (but not required). Paper copies always okay. Before disclosure, must advise franchisee of different formats in which disclosure document is available Notice may be given personally, by telephone or in writing by paper or electronically; written notice recommended
Receipt Signatures can be handwritten or use electronic methods Security codes, passwords, electronic signatures, and similar devices through which a person s identity can be authenticated are okay. Keep the signed and dated receipt page from all prospects (or, if you use electronic disclosure, keep careful and complete records of the date your prospect acknowledged receiving the FDD).
Receipt Before furnishing an FDD confirm that both receipts identify all franchise sellers involved in the offering. Receipts must state franchise sellers names, business addresses and business telephone numbers or refer to exhibit with that information. Franchise sellers includes only persons who have been or will be dealing directly with the prospect, including key officers or employees and any broker. Any person who will receive a sales commission or quota credit for sale must be identified.
What Is An Offer In A Registration State? Any attempt to offer to dispose of, and any solicitation of an offer to buy, a franchise. Examples of an "offer": Giving the prospect a Disclosure Document; Giving the prospect franchise literature or marketing materials; An advertisement directed to, or that will reach prospects, in the state; or Talking to the prospect about the franchise.
Offer (continued) Is all advertising considered an offer in a registration state? No. Advertising exception - publication of general circulation (2/3 or more is outside of registration state at issue) Internet website (so long as appropriate disclaimers are placed on site) Facebook, Twitter, MySpace pages
Offer (continued) What do you do when someone from a state where you are not registered expresses an interest in buying a franchise? Send them a letter stating that you are not registered, that you cannot give them any information until you are registered, and that you will get back to them when you are registered.
Financial Performance Representations FPR: any representation, whether oral, visual or written, to a prospect that states, expressly or by implication, a specific level or range of actual or potential sales, income, gross profits or net profits. Don t make a statement that is not in Item 19 of FDD Be careful! Some examples of FPRs: Software program containing spreadsheet with assumed cost percentages. Published article stating that some franchisees have earned a specified amount. You will earn enough to be own a new Porsche within a year. You will break even within 6 to 9 months. The sales and cost projections in the pro forma prepared by your accountant look reasonable to me. You are likely to realize a 100% return on investment within the first year of operation.
When Does A State s Law Apply? It is possible that the laws of more than one state will apply to a single sale. A state s registration law potentially applies if: Your (the franchisor s) office is located there; You meet with a prospect there; The prospect lives there; You direct an offer to the state or offer is accepted there); The franchised business will be located there. Example: Prospect, who lives in Maryland, wants to buy franchise that will be located in Virginia. You must be registered in both states to offer or to sell.
Advertising Filing Requirements Many registration states require that you file all materials that will be used in the solicitation of franchise sales BEFORE using them States requiring filing: CA, MD, MN, NY, ND, RI, SD, WA No filing: HI, IL, IN, MI, VA, WI See chart for reference Materials you must file: Newspaper ads soliciting franchisees (but remember out-of-state exception). Written marketing materials such as brochures If your Internet site has any references to the availability of franchises, you may have to file certain documents relating to the web site (depending on the state).
Advertising (continued) Cannot contain: Statement or inference that the purchase of the franchise is a safe investment, or that failure, loss default is impossible or unlikely, or that earnings or profits are assured. Untrue or misleading statements or information. Information that is inconsistent with the FDD. (In some states, including California): use of terms like successful or profitable. Maryland and Washington: Financial Performance Representations, even when they are in FDD.
Brokers 48 states: no license needed for franchise brokers. Exceptions: New York and Washington New York: broker needs to complete and return notarized registration form and update annually In Washington, broker must register, update annually. Must keep detailed records of franchise sales, including price paid, terms of payment, commission received, and advertising spend. Must also file report of franchise sales Most registration states: franchisor must disclose brokers on Franchise Seller Disclosure Form Often filed with initial registration California, Hawaii, Illinois, Indiana, Maryland, Minnesota, North Dakota, New York, Rhode Island, and Washington
Thank you! Matt Kreutzer mkreutzer@armstrongteasdale.com www.forwardfranchising.com