Franchise Registration & Renewal Requirements
In states that mandate presale registration, franchises cannot lawfully be granted until the franchisor has complied with the registration requirements. Failure to comply can result in administrative proceedings, public or private civil actions, or even criminal prosecution.
What are Registration and Renewal Requirements?
All registration states accept the Uniform Franchise Offering Circular format. Some also accept the FTC disclosure format. However, the laws and regulations of each state must be consulted in order to ensure compliance with its individual registration and disclosure provisions. These laws and regulations are included in the GUIDE, as are the UFOC and FTC forms.
Registrations are not necessarily immediately effective; instead, waiting periods of up to 30 days might be imposed in order to give the regulators the opportunity to review the filed documents for completeness. By law or regulation, many states require franchisors to renew a registration, or file a report, annually.
The North American Securities Administrators Association (NASAA) has developed a coordinated review procedure for franchise registrations in multiple states. The procedure is designed to streamline the franchise registration process by funneling communication and comments on registration applications through a "lead state" chosen to coordinate the review. In order to be eligible for coordinated review, a franchisor must file applications in two or more participating states and must provide audited financial statements with its registration application. The franchisor must be filing an initial registration application in each participating state. There is no additional fee for coordinated review; however, the franchisor still must pay the applicable registration fees for each state in which it is registering.
A franchisor could not be refused registration of an offering prospectus on the grounds that the franchisor's felony conviction created an unreasonable risk to prospective franchisees without the procedural due process rights of a fair hearing, cross-examination of witnesses, and notice of evidence to be considered. Lee Myles Associates Corp. v. Abrams (NY S Ct 1982).
An offer to sell a franchise need not qualify as an "offer" under ordinary contract law standards. "Offer to sell" is often defined broadly enough to include the attempt to offer to sell or the solicitation of an offer to buy a franchise or an interest in a franchise. The Illinois statute specifically includes coverage of the offer or sale of an option to purchase a franchise.
However, the renewal or extension of an existing franchise is not generally considered a sale if there has been no interruption in the franchisee's business.
Furthermore, the effect of registration laws is not restricted to what are commonly thought of as sales. "Sale" normally includes any disposition of a franchise for value.
What Affect does Non-Compliance have on these Requirements?
State laws frequently give officials the authority, without a prior hearing, to order a halt to franchise sales if there has been a failure to register successfully. The violation of such a stop order could constitute a criminal offense. In some states, any violation of the registration laws is a crime, regardless of whether there is a stop order in effect.
Whether a franchisee can rescind an agreement that was not properly registered before the sale varies from state to state. Some always allow a rescission, while others provide the remedy if there was a willful violation of the state laws or regulations. A "willful" violation is usually considered to be one that was performed knowingly or willingly, not necessarily one that was intended to injure or defraud another. Liability for a failure to register is not limited to the franchisor. Owners, shareholders, officers, and others who control the franchise seller, directly or indirectly, can be liable.
Who Regulates the Registration and Renewal Requirements?
State franchise registration regulators have been given broad enforcement and rulemaking authority. In various states, their powers include the ability to: sue for equitable relief or damages; undertake investigation inside or outside of the state; hold hearings; administer oaths, subpoena witnesses, and compel the production of evidence; order franchise sales stopped pending a hearing; accept service of process for nonresidents; make rules; prescribe forms; issue interpretive opinions; grant exemptions from registration or disclosure requirements; and deny, suspend, or revoke registrations.
Of course, the powers --both rulemaking and enforcement --must be exercised within constitutional limitations.
Are there Exemptions to the Requirements?
Franchise offerings can be exempt from the registration requirements of state laws based on characteristics of the franchisor, the franchisee, or the offering. Exemptions can be conferred by statute, by regulation, or by a state regulator. Exemptions must be considered in light of a state's registration requirements --one state might declare an offering to be exempt from registration while another simply does not include it within those transactions that must be registered. For example, Illinois excludes from the definition of a franchise a transaction requiring the payment of a fee of less than $500, while Michigan defines the arrangement as a franchise but exempts it from registration.
Registration exemptions based on the net worth of the franchisor or the franchisor's corporate parents are perhaps the most important, existing by statute in eight states. The experience of the franchisor and the sophistication of the prospective franchisee are other factors that might qualify an offering for an exemption.
A franchisee's sale of a franchise, for its own account and not through the franchisor, is generally exempt from registration, as are offers to sell an additional franchise to an existing franchisee and renewals of existing franchises. Offers and sales to banks and other financial institutions are frequently covered by statutory exemptions.
Isolated sales --sometimes described as no more than one sale in 12 months --that are not part of a franchise distribution plan are exempt under some state laws. Franchise sales by executors or administrators and by bankruptcy trustees are frequently exempt from registration.
A franchisor must file a request with the state regulator in order to secure an exemption from registration. Prospective franchisees are entitled to notice and disclosures as provided by the various state statutes. It has been held that strict compliance with exemption requirements is necessary or the exemption will be lost.
Since each state that requires registration has unique criteria determining which offerings are subject to registration, and which of those are eligible for exemption from registration, close attention to state statutes and regulations is necessary.
ALL SUMMARY INFORMATION FOUND AT HTTP://BUSINESS.CCH.COM/
CCH BUSINESS GUIDE, FRANCHISE AND DISTRIBUTION #315, JANUARY 20, 2006.
General Recommendations:
Franchisors and franchisees need to be certain they comply with all local, state, and federal laws. The very complex nature of franchise and distribution laws can make compliance and success difficult. Experienced legal counseling is best to ensure your rights and obligations are being protected – protecting your future. Mohajerian Law Corp. can help you understand the law, how it affects you, and actively protect your rights.
