How the Amended FTC
Franchise Rule Knocks Down
Barriers to Franchising Into the
USA
by:
Carl E. Zwisler
Haynes and Boone, LLP
October 4, 2007
UFOC
First
State
US GAAP
Personal Franchise
Audited
Meeting Registration Financial
Statements
5
Business
Day
Closing
Delay
Litigation
Fear
2
UFOC
a. Unimaginably Frustrating for Overseas
Companies
b. Unfortunately, Few Overcome Cost (of
compliance)
c. Unusually Fulfilling (for wallets) of Overseas
Counsel
d. Uniform Franchise Offering Circular
3
U
F
O
C
Since 1979, no franchise may be sold
unless prospective franchises received a
Uniform Franchise Offering Councilor (UFOC)
disclosure
UFOC Contains:
•
22 items of disclosure
•
List of all franchisees
•
Copies of agreements
•
Franchisor financial statements
•
Earnings claims (if made)
4
Global First Personal Meeting
Etiquette
5
US Franchise First Personal
Meeting Etiquette
Franchisee
Franchisor
6
First
Personal
Meeting
UFOC Must be presented to a prospective franchise at
First Personal meeting
•A meeting to discuss the sale or possible sale of a franchise.
Without a UFOC to present, no sales discussions are
permitted with prospective franchisee.
7
State
Franchise
Registration
In 13 states, no franchise may be
offered until UFOC is approved by a
state agency.
One state requires filing, but no
registration. One state requires
disclosure, but not filing or
registration
8
Washington
New Hampshire
Montana
North Dakota
Maine
Vermont
Minnesota
Oregon
Mass.
Wisconsin
Idaho
South Dakota
New York
Wyoming
Iowa
Nevada
Pennsylvania
Nebraska
Illinois
Utah
Indiana
Ohio
New Jersey
Delaware
Colorado
Kansas
Virginia
Missouri
North Carolina
South
Carolina
Arkansas
New Mexico
Maryland
Kentucky
Tennessee
Oklahoma
Arizona
Rhode
Island
Connecticut
Alabama
Georgia
Texas
Louisiana
Florida
Hawaii
States Requiring
Franchise Registration
and/or Disclosure
Alaska
Puerto Rico
9
State
Franchise
Registration
In 26 states, some franchisors must
comply with state business
opportunity sales laws.
10
Franchise Registration/Disclosure and
Business Opportunity States
Washington
Washington
New Hampshire
North Dakota
Montana
Maine
Vermont
Minnesota
Oregon
Idaho
Mass.
Wisconsi
n
South Dakota
New York
Wyoming
Iowa
Nevada
Pennsylvania
Nebraska
Nebrask
a
Illinois
Utah
Utah
Indiana
Ohio
Rhode
Island
Connecticut
New Jersey
Delaware
Colorado
Kansas
Missouri
Virginia
Maryland
Kentucky
Arizona
North Carolina
Tennessee
Oklahoma
South
Carolina
Arkansas
New Mexico
Alabama
Georgia
Texas
Texas
Louisiana
Hawaii
Business
Opportunity
Laws
Franchise
Registration
and/or Disclosure
Laws
Business
Opportunity and Franchise
Registration and/or Disclosure Laws
Florida
Alaska
Puerto Rico
U.S. Virgin Islands
11
Disclosure
Audit
Filing Fees
Review Time
State
Franchise
Registration
State Business
Opportunity
Filing
FDD
(60-500 pages)
State “Bus. Opp.”
Disclosure Document
(5-10 pages)
US GAAP
No Audit (usually)
$250-$675 (initial)
$25-$500 (initial)
2-3 Months
1-2 Weeks
(little or no review)
12
The Count
“Counting can be
lots of fun when
you start with
number 1”.
13
US GAAP
Audited
Financial
Statements
UFOC must include 3 years financial statements
audited under, US Generally Accepted
Accounting Principles.
•Foreign audits are not acceptable
14
5
Business
Day
Closing
Delay
Franchisees must review complete final versions
of
•Franchise Agreements
•Related Agreements
5 Business Days before signing
•If negotiations occur at a closing which benefit franchisor,
closing must be delayed 5 business days.
15
Fear of Litigation
Lawyer
Franchiso
r
16
Litigation
Fear
US franchisees are reputed to sue franchisors
whenever they are unhappy with their
investments.
17
The Problem
•
•
•
•
•
•
All franchisors must provide
All prospective franchisees
A UFOC
Containing US GAAP Audited Financial Statements
At the First Personal Meeting
Must first register the franchise in states with jurisdiction over
the franchise offer
Problem =
+
18
The
Amended
FTC Rule
Eliminate
s or
Mitigates
most
Barriers.
19
Eliminates
Issue
UFOC
First
State
US GAAP
Personal Franchise
Audited
Meeting Registration Financial
Statements
Mitigates
Issue
5
Business
Day
Closing
Delay
Litigation
Fear
20
First
Personal
Meeting
5
Business
Day
Closing
Delay
New Rule:
New Rule:
Deliver FDD at
least 14 days
before signing
Franchise
Agreement or
No additional cooling off
period, Unless franchisor
UNILATERALLY
changes terms of
agreement from what
21
RIP
UFOC
1974
2008
Now “UFOC” is “FDD” (Franchise Disclosure Document)
22
Franchisee
Franchisor
No more First Personal Meeting Requirement
23
•
Required disclosures may be delivered electronically.
•
US GAAP requirement waved if US SEC approves use
of Franchisor’s country’s GAAP for US securities
reporting
•
Affiliate may be established to franchise in US and, absent
parent’s formal agreement to provide services to franchisees or
to guaranty franchisor’s financial performances, only franchisor
affiliate statements require US GAAP audit.
24
UK Franchisor
US
Franchisee
US
GAAP
Audit
UK Parent
or
US
Franchisor
Subsidiary
US
GAAP
Audit
US
Franchisee
25
If Franchisor has not offered franchises in
US, no audit required for first year of
franchise offers*
--Phase in over 3 years
* Not applicable in franchise registration states.
26
In states where registration or
disclosure is not required, 3
new exemptions ABOLISH
DISCLOSURE
REQUIREMENTS!!
27
Exemptions
$ 1 Million initial
investment
$1 Million includes investment in multiple franchises
under: Area Development and Master Franchise
Agreements.
$1 Million does not include:
1.
Amounts financed by the franchisor and its affiliates.
2.
Investments in unimproved real property (“raw land”)
28
Exemptions Continued
$5 Million net worth and 5 years business
experience of franchisee, its parent or
affiliates.
29
Exemptions
Franchise Officers, Managers and
Owners
a.
If Franchisor or one or more of its officers, directors, general
partners, owners, or managers…
Owns at least 50% of prospective franchisee, the sale is
exempt.
b.
•
•
•
officers, or managers, etc. must have been associated with the
franchisor for at least 2 years.
have continued the association with the franchisor until 60 days
before the franchise sale.
owners must own at least 25% interest in franchisor and have
had such interest for at least 2 years up to 60 days before sale.
30
If a franchisor can qualify for an
exemption, how can it deal with
state law issues?
31
1.
Avoid all states with a franchise registration or
disclosure law.
Washington
New Hampshire
Montana
North Dakota
Vermont
Minnesota
Maine
Oregon
M
Wisconsin
Idaho
South Dakota
Wyoming
Mass.
ich
iga
n
New York
Iowa
Nevada
Pennsylvania
Nebraska
Illinois
Utah
Indiana
Ohio
C
r
ifo
al
Kansas
New Jersey
est nia
W irgi
V
Colorado
a
ni
Missouri
Rhode
Island
Connecticut
Delaware
Virginia
Maryland
Kentucky
North Carolina
Tennessee
Oklahoma
Arizona
South
Carolina
Arkansas
Texas
Mi
ssis
sip
pi
New Mexico
Alabama
Louisiana
Hawaii
Georgia
Florida
REG/DIS
Alaska
Puerto Rico
32
2.
Qualify for exemptions from
state business opportunity laws
by obtaining a US trademark
registration
33
Washington
New Hampshire
Montana
North Dakota
Vermont
Minnesota
Maine
Oregon
Mass.
Wisconsin
Idaho
South Dakota
New York
Wyoming
Iowa
Nevada
Pennsylvania
Nebraska
Illinois
Utah
Indiana
Ohio
New Jersey
Delaware
Colorado
Kansas
Virginia
Missouri
North Carolina
South
Carolina
Arkansas
New Mexico
Maryland
Kentucky
Tennessee
Oklahoma
Arizona
Rhode
Island
Connecticut
Alabama
Georgia
Texas
Louisiana
Florida
Hawaii
Business Opportunity
States Requiring
Franchisor Filing If
No U.S. Registered
Trademark
Alaska
Puerto Rico
34
If Franchisor:
1. has a US trademark registration, and
2. does not guaranty success or promise
refunds if franchisees are not happy and,
3. it qualifies for an FTC Rule Exemption
Only 3 state business opportunity
laws require disclosure.
35
Washington
Washington
New Hampshire
North Dakota
Montana
Maine
Vermont
Minnesota
Oregon
Idaho
Wisconsi
n
South Dakota
New York
Wyoming
Iowa
Nevada
Pennsylvania
Nebraska
Nebrask
a
Illinois
Utah
Utah
Indiana
Ohio
New Jersey
Delaware
Colorado
Kansas
Missouri
Virginia
Maryland
Kentucky
Arizona
North Carolina
Tennessee
Oklahoma
South
Carolina
Arkansas
New Mexico
Alabama
Georgia
Texas
Texas
Louisiana
Hawai
i
Florida
States Requiring
Franchise Registration
and/or Disclosure
Alaska
Business Opportunity States Which
Require Exempt Franchisors to
Provide Disclosure
Puerto Rico
U.S. Virgin
Islands
36
So, if you qualify for an exemption but do
not have a US registered trademark you
may grant franchises without disclosure
in the “white States.
37
Washington
Washington
New Hampshire
North Dakota
Montana
Vermont
Minnesota
Maine
Oregon
Idaho
Wisconsi
n
South Dakota
New York
Wyoming
Iowa
Nevada
Pennsylvania
Nebraska
Nebrask
a
Illinois
Utah
Utah
Indiana
Ohio
New Jersey
Delaware
Colorado
Kansas
Missouri
Virginia
Maryland
Kentucky
Arizona
North Carolina
Tennessee
Oklahoma
South
Carolina
Arkansas
New Mexico
Alabama
Georgia
Texas
Texas
Louisiana
Hawai
i
Florida
Business
Opportunity States
Requiring Franchisor Filing If No
U.S. Registered Trademark
States Requiring
Franchise Registration
and/or Disclosure
Alaska
Business Opportunity States Which
Require Exempt Franchisors to Provide Disclosure
Puerto Rico
U.S. Virgin
Islands
38
With a US trademark registration
• A franchisor must register in the “yellow” states;
and disclose in the “blue” state
• In 32 states no disclosure or registration is
required (although a few exemption notices may
be required).
39
Washington
Washington
New Hampshire
North Dakota
Montana
Maine
Vermont
Minnesota
Oregon
Idaho
Wisconsi
n
South Dakota
New York
Wyoming
Iowa
Nevada
Pennsylvania
Nebraska
Nebrask
a
Illinois
Utah
Utah
Indiana
Ohio
New Jersey
Delaware
Colorado
Kansas
Missouri
Virginia
Maryland
Kentucky
Arizona
North Carolina
Tennessee
Oklahoma
South
Carolina
Arkansas
New Mexico
Alabama
Georgia
Texas
Texas
Louisiana
Hawai
i
Florida
States Requiring
Franchise Registration
and/or Disclosure
Alaska
Business Opportunity States Which
Require Exempt Franchisors to
Provide Disclosure
Puerto Rico
U.S. Virgin
Islands
40
State
Franchise
Registration
No law changes since Amended Rule
release,
but
Only the FDD may be used for
disclosures. FTC interpretations of FDD
disclosure requirements should increase
consistency of state reviews.
41
Litigation
Fear
•Not addressed by FTC Rule
•Most small franchisors do not have litigation
•Leegin decision of US Supreme Court allowing vertical price
fixing claims to be evaluated under a “rule of reason” may reduce
franchise “price fixing claims”
No material threat of franchise legislation exists
•Rhode Island enacted a franchise relationship law in 2007, the
first state to do in 15 years.
42
The FTC Welcomes You to the
USA
43
Thank you
Carl E. Zwisler
Haynes and Boone, LLP
1615 L Street, NW, Suite 800
Washington, DC 20036-5610
Telephone 202-654-4540
Facsimile 202-654-4270
carl.zwisler@haynesboone.com
44