NASAA Issues Revised Proposal for Model Franchise Exemptions

This posting was written by Pete Reap, Editor of the CCH Business Franchise Guide.

The Franchise and Business Opportunity Project Group of the North American Securities Administrators Association (NASAA) re-released for comment yesterday proposed changes to NASAA’s Model Franchise Exemptions. The proposal includes model language for states to use to promulgate exemptions from registration and disclosure provisions under current state laws.

In response to a previous solicitation for comment, NASAA received a total of six public comments regarding various provisions in the Model Exemptions.

After considering the comments, the Franchise Project Group concluded that, in general, the Model Exemptions strike the right balance between the desirability of reducing compliance burdens on franchisors and the need for prospective franchisees to review Franchise Disclosure Documents in appropriate cases in order to make informed investment decisions. The Franchise Project Group decided—in light of several comments—to propose revisions to specific Model Exemptions.

Revised Exemptions include the Fractional Franchise Exemption, the Experienced Franchisor Exemption, the Sophisticated Purchaser Exemption, and the Discretionary Exemption.

A new release, including a link to download the Revised Proposed Model Franchise Exemptions, appears here.

Comments will be accepted through May 16, 2012. They should be sent by email or in writing to:

Dale Cantone
Chair, 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
Email: dcantone@oag.state.md.us

or

Joseph Opron
Counsel
NASAA
750 First Street, NE
Suite 1140
Washington, DC 20002

Email: jjo@nasaa.org

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.

Focus on Franchising

This posting was written by John W. Arden.

News and notes on franchising and distribution topics:

 The Franchise and Business Opportunity Project Group of the North American Securities Administrators Association (NASAA) has proposed that states amend their franchise disclosure laws to change the delivery rules for franchise disclosure documents. The group proposes that states (1) eliminate the requirement that franchisors provide a disclosure document at the “first personal meeting” with prospective franchisees and (2) revise statutory provisions requiring disclosure within “10 business dates” to require delivery “14 calendar days” prior to the signing of an agreement or payment of money. The proposal follows the franchise delivery requirements of the new FTC franchise disclosure rule, which was adopted in 2007. The NASAA project group has solicited internal and public comment on this proposal. The comment period, which began on July 29, extends through August 18, 2009. Further information on the proposal and the procedure for filing written comments appears here at the NASAA website.

 U.S. franchisors faced with a sluggish domestic economy are discovering “willing investors and growth opportunities overseas,” according to an article published August 11 in the Wall Street Journal. The article—by reporter Richard Gibson—says that the overseas push is fueled in large part by saturation of the U.S. market. However, in this challenging economy, the ability of overseas master franchisees to bankroll franchise operations has become even more important, as domestic franchisees find it more difficult to obtain bank loans to finance their businesses. The numbers are compelling. McDonald’s Corp. has opened 286 foreign units this year, compared with only 53 U.S. units. Subway has opened 1,432 units abroad and only about 1,230 here at home. Meanwhile, Curves International Inc. has experienced double-digit growth abroad, particularly in Brazil, Central Europe, and Eastern Europe. Japan is now its biggest overseas market, with 744 locations. It opened its first unit in China in May. Text of the story (“U.S. Franchises Find Opportunity to Grow Abroad”) appears here on the Wall Street Journal online.

 The New York State Department of Taxation and Finance is creating an automatic 90-day extension process for franchisors required by a new law to report gross sales of each franchisee within the state, sales by the franchisor to the franchisee, and any franchisee income reported to the franchisor, according to Troy Flanagan of the International Franchise Association. New legislation, effective on April 7, 2009, requires franchisors to file annual information returns with the State Department of Taxation and Finance on or before March 20. That return must cover the four quarterly sales tax periods immediately preceding. The law provides that the first returns must be filed on or before September 20, 2009, and cover the period of March 1, 2009 through August 1, 2009. Returns filed on or before March 20, 2010, must cover the period from September 1, 2009 through February 28, 2010. Prior to the initial September 20, 2009, deadline, the Department will post on its website instructions to request an automatic 90-day extension to December 20, 2009. All future annual deadlines will be given a similar treatment, according to Flanagan. Further information on the reporting requirement appears here at the Department website.