NASAA Requests Public Comment on Model Exemptions from State Franchise Laws

This posting was written by John W. Arden.

Proposed Model Exemptions from state franchise laws were released for public comment on July 1 by the North American Securities Administrators Association (NASAA).

The proposal provides model language for states to use for exemptions from registration and disclosure provisions of their franchise laws.

The proposal contains four types of exemptions from disclosure and registration requirements:

(1) A fractional franchise exemption;
(2) An experienced franchisor exemption;
(3) A set of three sophisticated purchaser exemptions; and
(4) A discretionary exemption.

These proposed exemptions include some elements of existing exemptions to state franchise laws, although “requirements have been updated to reflect current conditions in franchising and the U.S. economy,” according to NASAA.

The fractional franchise exemption would exempt offers and sales of franchises where the franchisee (or its officers or directors) has more than two years of experience in the same type of business and the parties have a reasonable expectation that sales arising from the franchise relationship will not exceed 20% of the franchisee’s total dollar volume in the first year of operation.

The experienced franchisor exemption would apply to franchise offers or sales where the franchisor has equity of not less than $10 million or not less than $1 million and the franchisor is owned by a corporation or entity that has equity of not less than $10 million.

A sophisticated purchaser exemption would be available under the following circumstances: (1) the offer or sale is for an additional franchise to an existing franchisee where the franchisee has been managing agent or owner for at least 24 months, the franchise is being purchased in order to operate the business, and the sale of the first franchise was lawful; (2) the offer or sale is to a franchisor insider; (3) the purchaser is a high net worth individual, a high income individual, an entity with equity exceeding $5 million, or a trust exceeding $5 million, represented by legal counsel and the franchisor reasonably believes that the prospective franchisee has sufficient knowledge and experience to evaluate the merits and risks of the investment; or (4) the offer or sale requires a substantial investment in excess of $2 million and does not exceed 20% of the franchisee’s net worth, the prospective franchisee is represented by legal counsel, and the franchisor reasonably believes that the prospective franchisee has sufficient knowledge and experience to evaluate the merits and risks of the investment.

Finally, the discretionary exemption could be claimed if the franchisor makes a written request to the franchise administrator setting forth the basis for the exemption, files a notice of exemption, and pays the exemption fee.

Comments on the proposal will be accepted through August 1. They should be sent by e-mail or in writing to:

Dale Cantone
Chair, NASAA Franchise and Business Opportunity Project Group
Office of the Maryland Attorney General
Division of Securities
200 St. Paul Place, 20th Floor
Baltimore, MD 21202-2020, dcantone@oag.state.md.us

or

Joseph Opron
Counsel
NASAA
750 First Street, NE, Suite 1140
Washington, D.C. 20002, jjo@nasaa.org

A Notice of Request for Public and Internal Comment appears here on the NASAA website. Text of the Proposed Model Exemptions appears here.

Further information will be reported in the CCH Business Franchise Guide.