NASAA Project Group Seeks Public Comment on Multi-Unit Franchising

This posting was written by John W. Arden.

In connection with its work on a new commentary, the Franchise and Business Opportunities Project Group of the North American Securities Administration (NASAA) is seeking public comments on disclosure obligations under the FTC franchise rule and state franchise laws for the many forms of multi-unit franchising.

Multi-unit franchising includes arrangements such as area development or representation agreements, area or regional franchises, development agent agreements, subfranchises, and master franchises.

Parties involved in multi-unit franchising often have questions about disclosure obligations under the FTC rule and state laws, according to Dale E. Cantone, Deputy Commissioner of the Securities Division of the Maryland Attorney General’s Office and Chair of the Franchise and Business Opportunities Project Group.

Some multi-unit franchise issues have been addressed by the FTC in FAQs 9 and 13 (CCH Business Franchise Guide ¶6090), by NASAA in Sections 20.2, 20.3 and 20.4 of the Commentary on the 2008 Franchise Registration and Disclosure Guidelines (CCH Business Franchise Guide ¶5706), and by California in Release 18-F (CCH Business Franchise Guide ¶5050.49).

The NASAA project group intends to give expanded guidance on these and other issues and seeks comments on what should be addressed in the commentary.

Interested persons should submit issues, ambiguities, and problems as well as potential solutions. The group invites submission of any relevant cases, statutory provisions, regulations, papers, or other resources.

Comments should be sent by April 22, 2011. Persons comfortable with sharing ideas with attribution should send their comments directly to project group members Dale Cantone (dcantone@oag.state.md.us) and Theresa Leets (tleets@corp.ca.gov).

Those preferring to share ideas on a confidential basis should send comments to Warren Lewis of the Akerman law firm (warren.lewis@akerman.com), Ron Gardner of Dady & Gardner (rkgardner@dadygardner.com), or Chuck Modell of Larkin Hoffman (cmodell@larkinhoffman.com).

Illinois Amends Franchise Disclosure Act

This posting was written by John W. Arden.

Legislation bringing the Illinois Franchise Disclosure Act of 1987 in line with the 2007 FTC Franchise Rule was signed by Governor Pat Quinn on August 24.

The measure requires that franchise disclosure statements be prepared in accordance with the FTC Franchise Rule (16 C.F.R. Part 436, CCH Business Franchise Guide ¶6010), provides new exemptions from the registration requirement, and makes registration deadlines consistent with the FTC Franchise Rule's renewal requirements.

Exemptions from Registration

Amendments exempt from the registration requirement (1) franchisors that have a net worth of at least $15 million or a net worth of at least $1 million and are at least 80 per cent owned by a corporation with a net work of $15 million; (2) sales to franchisees having been in business for at least five years and having a net worth of at least $5 million; and (3) sales to “insiders” of the franchisor.

Franchisors exempt from registration requirements still must provide prospective franchisees with disclosure documents.

Registration Deadlines, Disclosure Statement Amendments

Registrations of a franchise shall expire 120 days after the franchisor’s fiscal year end, and franchisors must file updated disclosure statements prior to expiration of a registration.

Disclosure statements will have to be amended within 30 days after the close of each quarter of a franchisor’s fiscal year, reflecting material changes to the disclosures.

Further amendments repeal the registration requirement for franchise brokers and impose fees for the filing of an initial large franchisor exemption ($500) and renewal of the exemption ($100).

The legislation (Public Act 096-0648) also amends the Illinois Business Brokers Act of 1995 and the Illinois Business Opportunity Sales Law of 1995. Amendments to these laws update references to the franchise disclosure requirements in the laws’ exemption provisions.

The amendments will take effect on October 1, 2009. Text of the amending law appears here on the Illinois General Assembly's website.

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.