Tuesday, January 23, 2007

FTC Issues New Disclosure Rules for Franchise, Business Opportunity Sales

After nearly 12 years of rulemaking activity, the Federal Trade Commission has issued the first revision to the FTC franchise disclosure rule since it was promulgated in 1979. On January 22, the Commission amended the rule—including separating requirements for franchising and business opportunity ventures—in order to streamline the disclosure requirements, minimize compliance costs, and respond to changes in technologies and market conditions. The Commission approved the new rules by a 5-0 vote.

A primary goal in amending the franchise disclosure rule was to harmonize the federal requirements with state franchise disclosure laws, according to the FTC. The amendments brought the rule into much closer alignment with state franchise disclosure laws and the Uniform Franchise Offering Circular (UFOC), a uniform disclosure format that may be used in all states mandating presale disclosure and registration.

In some instances, the new franchise rule requires more extensive disclosures than the UFOC, particularly with regard to aspects of the franchise relationship (litigation against franchisees, the absence of exclusive territories, and franchise associations). In a few instances, the franchise rule requires less disclosure than the UFOC (“risk factors,” franchise broker information, required purchases of computer equipment).

Under the new scheme, disclosure rules for franchises and businesses opportunities appear separately (Part 436 covering franchises, with Part 437 preserving the text of the original rule governing business opportunity ventures). The amended rules are effective on July 1, 2007. However, franchisors and business opportunity sellers may continue to use the original franchise rule until July 1, 2008.

The rulemaking is the culmination of a long, arduous process, which started with a regulatory review of the franchise rule in 1995. The Commission solicited public comments and held two public workshops in 1995 and 1996. An Advanced Notice of Proposed rulemaking was published in 1997 (CCH Business Franchise Guide ¶11,122), which was followed by six public workshops. A Notice of Proposed Rulemaking was published in 1999 (CCH Business Franchise Guide ¶11,713), and a staff report on the proposed revisions was released in August 2004 (CCH Business Franchise Guide ¶12,880).

A news release and text of the rules, along with a Statement of Basis and Purpose, are available on the FTC web site. An official notice will appear in the Federal Register.

The disclosure rules will appear in the CCH Business Franchise Guide. Wolters Kluwer Law and Business will publish a book containing the text of the disclosure rules and Statement of Basis and Purpose, along with expert analysis and explanatory materials.

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