FTC Raises Monetary Thresholds for Three Exemptions to Franchise Disclosure Rule

This posting was written by John W. Arden.

The Federal Trade Commission is amending its franchise disclosure rule to raise the monetary thresholds used to determine whether a franchise sale is exempt from the rule, which requires presale disclosure information to prospective franchise purchasers.

The 2007 amendments to the franchise rule provide three exemptions based on a monetary threshold in 16 CFR Part 436 .8 (CCH Business Franchise Guide ¶6018).

These exemptions are for:

(1) Franchise sales in which the purchaser must make required initial payments of less than $540 (currently $500), §436.8(a) (1);

(2) Franchise sales in which the initial investment is at least $1,084,900 (currently, $1 million), excluding the cost of unimproved land and financing received from the franchisor or an affiliate, §436.8(a) (5) (i); and

(3) Franchise sales to large entities that have been in business for at least five years and have a net worth of at least $5,424,500 (currently $5 million), §436.8(a)(5)(ii).

The franchise rule requires the FTC to adjust the monetary thresholds every four years, based on the Consumer Price Index. The adjustments will take effect on July 1, 2012.

The Commission voted 5-0 to approve the Federal Register Notice on the adjustments. Further information on the franchise rule amendments appear here on the FTC website.

Manitoba Seeks Public Comment on Proposed Franchise Rules

This posting was written by John W. Arden.

The Province of Manitoba is seeking public comment on proposed regulations under the Manitoba Franchises Act, which was passed June 17, 2010 and will come into force on a date determined after the regulation is finalized.

The Act requires franchisors to make presale disclosures to prospective franchisees using a prescribed disclosure document, imposes a duty of good faith and fair dealing on parties to franchise agreements, and provides franchisees with the right to associate and a right of rescission.

As with franchise legislation enacted by Prince Edward Island and New Brunswick, the Manitoba statute is based on the Uniform Franchises Act (CCH Business Franchise Guide ¶7021), a model law that was adopted by the Uniform Law Conference of Canada.

As proposed, the regulation would establish specific requirements of the disclosure document, prescribe delivery methods, provide an exemption from the financial statement disclosure requirement for mature franchisors, and furnish a small investment exemption.

The Province has published a consultation paper, providing background to the law and regulations and describing the important provisions of the proposed regulation.

The “key features” of the proposal include:

Contents of disclosure document. The contents of the required disclosure document would closely follow those of Ontario, Prince Edward Island, and New Brunswick in order to facilitate use of documents prepared for other jurisdictions.

Wraparound documents. The proposal would allow use of a disclosure document prepared for another jurisdiction if the franchisor includes supplementary information required by Manitoba in a “wraparound document.”
Risk warnings. The rules would require the disclosure document to include warnings advising the franchisee to seek information about the franchisor and to obtain legal and financial advice.

Financial statements. The franchisor would be required to include its most recent financial statements in the disclosure document. A mature franchisor with a good record of compliance might qualify for an exemption from this requirement.

Electronic and courier delivery. The disclosure document and subsequent material changes may be delivered by a prepaid courier or by electronic means. A notice of rescission must be delivered by prepaid courier.

Delivery of disclosure document in parts. Although normal practice would be to deliver the entire contents of the disclosure document together, a franchisor would be permitted to deliver the disclosure document in parts.

Restriction on refundable deposits. A franchisor is permitted to request and receive from a franchisee a refundable deposit not exceeding 20 percent of the initial franchise fee to a maximum of $100,000.

Small investment exemption. A franchisor may receive an exemption from the disclosure document requirement where the franchisee’s total annual investment does not exceed $5,000.

Text of the consultation paper, proposed franchise regulation, and the Manitoba Law Commission’s Franchise Law Report 2008 appears here on the Province of Manitoba website.

Written comments on the proposed regulation may be submitted through December 15, 2011. They should be sent to Franchises Consultation, Manitoba Entrepreneurship, Training and Trade, Small Business Branch, 250-240 Graham Avenue, Winnipeg MB R3C 0J7, telephone: 204-945-7721; Fax: 204-983-3852; e-mail: Franchises@gov.mb.ca.

Further details will appear in CCH Business Franchise Guide.

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.