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How the Amended FTC Franchise Rule Knocks Down Barriers to Franchising Into the USA by: Carl E. Zwisler Haynes and Boone, LLP October 4, 2007
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How the Amended FTC Franchise Rule Knocks Down Barriers to Franchising Into
the USAby:
Carl E. ZwislerHaynes and Boone, LLP
October 4, 2007
2
State Franchise
Registration
US GAAP Audited
Financial Statements
5 Business
Day Closing Delay
Litigation Fear
UFOC First Personal Meeting
3
UFOC
a. Unimaginably Frustrating for Overseas Companies
b. Unfortunately, Few Overcome Cost (of compliance)
c. Unusually Fulfilling (for wallets) of Overseas Counsel
d. Uniform Franchise Offering Circular
4
UFOC
Since 1979, no franchise may be sold unless prospective franchises received a Uniform Franchise Offering Councilor (UFOC) disclosure
• 22 items of disclosure
• List of all franchisees
• Copies of agreements
UFOC Contains:
• Franchisor financial statements
• Earnings claims (if made)
5
Global First Personal Meeting Etiquette
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US Franchise First Personal Meeting Etiquette
UFOC
Franchisor
Franchisee
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First Personal Meeting
UFOC Must be presented to a prospective franchise at First Personal meeting
•A meeting to discuss the sale or possible sale of a franchise.
Without a UFOC to present, no sales discussions are permitted with prospective franchisee.
8
State Franchise
Registration
In 13 states, no franchise may be offered until UFOC is
approved by a state agency.
One state requires filing, but no registration. One state requires
disclosure, but not filing or registration
9
Washington
Montana
Oregon
Idaho
Nevada
California
Wyoming
Utah
Arizona
Colorado
New Mexico
Oklahoma
Texas
Kansas
Nebraska
South Dakota
North DakotaMinnesota
Iowa
Missouri
Wisconsin Michigan
Illinois IndianaOhio
Kentucky
Tennessee
Arkansas
Louisiana
Mis
siss
ippi
Alabama Georgia
Florida
South Carolina
North Carolina
VirginiaW
est
Virgin
ia
Pennsylvania
New York
MaineNew Hampshire
Vermont
Mass.
RhodeIsland
Connecticut
New Jersey
Delaware
Maryland
Puerto RicoAlaska
Hawaii
States RequiringFranchise Registrationand/or Disclosure
10
State Franchise
Registration
In 26 states, some franchisors must comply with state
business opportunity sales laws.
11
Franchise Registration/Disclosure and Business Opportunity States
Washington
Montana
Oregon
Idaho
Nevada
California
Wyoming
Utah
Arizona
Colorado
New Mexico
Oklahoma
Texas
Kansas
Nebraska
South Dakota
North DakotaMinnesota
Iowa
Missouri
Wisconsin
Michigan
Illinois IndianaOhio
Kentucky
Tennessee
Arkansas
Louisiana
Mis
siss
ippi
Alabama Georgia
Florida
South Carolina
North Carolina
VirginiaW
est
Virgin
ia
Pennsylvania
New York
MaineNew Hampshire
Vermont
Mass.
RhodeIsland
Connecticut
New Jersey
Delaware
Maryland
Puerto RicoAlaska
U.S. Virgin Islands
BusinessOpportunityLaws
Oklahoma
Texas
UtahCaliforni
a
Nebraska
Washington
Franchise Registration and/or Disclosure Laws
Hawaii
BusinessOpportunity and FranchiseRegistration and/or Disclosure Laws
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State Franchise
Registration
State Business
Opportunity Filing
DisclosureFDD
(60-500 pages)
State “Bus. Opp.” Disclosure
Document (5-10 pages)
Audit US GAAP No Audit (usually)
Filing Fees $250-$675 (initial) $25-$500 (initial)
Review Time 2-3 Months1-2 Weeks
(little or no review)
13
The Count
“Counting can be lots of fun when you start with number 1”.
14
US GAAP Audited
Financial Statements
UFOC must include 3 years financial statements audited under, US Generally Accepted Accounting Principles.
•Foreign audits are not acceptable
15
Franchisees must review complete final versions of
•Franchise Agreements•Related Agreements
5 Business Days before signing•If negotiations occur at a closing which benefit franchisor, closing must be delayed 5 business days.
5 Business
Day Closing Delay
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Fear of Litigation
“Complaint” Your Franchise
v. You
Lawyer Franchisor
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Litigation Fear
US franchisees are reputed to sue franchisors whenever they are unhappy
with their investments.
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The Problem• All franchisors must provide• All prospective franchisees• A UFOC• Containing US GAAP Audited Financial Statements• At the First Personal Meeting• Must first register the franchise in states with jurisdiction over the
franchise offer
Problem =
+
19
The Amende
d FTC Rule
Eliminates or
Mitigates most
Barriers.
20
Mitigates Issue
Eliminates Issue
State Franchise
Registration
US GAAP Audited
Financial Statements
5 Business
Day Closing Delay
Litigation Fear
UFOC First Personal Meeting
21
First Personal Meeting
5 Business
Day Closing Delay
New Rule:
Deliver FDD at least 14 days before signing Franchise Agreement or accepting payment.
New Rule:
No additional cooling off period, Unless franchisor UNILATERALLY changes terms of agreement from what was disclosed.
22
Now “UFOC” is “FDD” (Franchise Disclosure Document)
UFOC 1974
- 2008
RIP
23
UFOC
Franchisor
Franchisee
No more First Personal Meeting Requirement
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• Required disclosures may be delivered electronically.
• US GAAP requirement waved if US SEC approves use of Franchisor’s country’s GAAP for US securities reporting
• Affiliate may be established to franchise in US and, absent parent’s formal agreement to provide services to franchisees or to guaranty franchisor’s financial performances, only franchisor affiliate statements require US GAAP audit.
25
UK Franchisor
US Franchisee
US Franchisor Subsidiary
US Franchisee
UK ParentUS GAAP Audit
orUS GAAP Audit
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If Franchisor has not offered franchises in US, no audit required for first year of franchise offers* --Phase in over 3 years
* Not applicable in franchise registration states.
27
In states where registration or disclosure
is not required, 3 new exemptions ABOLISH
DISCLOSURE REQUIREMENTS!!
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Exemptions$ 1 Million initial
investment
$1 Million includes investment in multiple franchises under: Area Development and Master Franchise Agreements.$1 Million does not include:1. Amounts financed by the franchisor and its affiliates.
2. Investments in unimproved real property (“raw land”)
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Exemptions Continued
$5 Million net worth and 5 years business experience of franchisee,
its parent or affiliates.
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Exemptions Franchise Officers, Managers
and Owners
a. If Franchisor or one or more of its officers, directors, general partners, owners, or managers…
b. Owns at least 50% of prospective franchisee, the sale is exempt.
• officers, or managers, etc. must have been associated with the franchisor for at least 2 years.
• have continued the association with the franchisor until 60 days before the franchise sale.
• owners must own at least 25% interest in franchisor and have had such interest for at least 2 years up to 60 days before sale.
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If a franchisor can qualify for an exemption, how can it
deal with state law issues?
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1. Avoid all states with a franchise registration or disclosure law.
Washington
Montana
Oregon
Idaho
Nevada
Wyoming
Utah
Arizona
Colorado
New Mexico
Oklahoma
Texas
Kansas
Nebraska
South Dakota
North DakotaMinnesota
Iowa
Missouri
Wisconsin
Illinois IndianaOhio
Kentucky
Tennessee
Arkansas
Louisiana
Alabama Georgia
Florida
South Carolina
North Carolina
Virginia
Pennsylvania
New York
Maine
New Hampshire
Vermont
Mass.
RhodeIsland
Connecticut
New Jersey
Delaware
Maryland
Puerto RicoAlaska
Hawaii
REG/ DIS
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2. Qualify for exemptions from state business opportunity
laws by obtaining a US trademark registration
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Washington
Montana
Oregon
Idaho
Nevada
California
Wyoming
Utah
Arizona
Colorado
New Mexico
Oklahoma
Texas
Kansas
Nebraska
South Dakota
North DakotaMinnesota
Iowa
Missouri
Wisconsin Michigan
Illinois IndianaOhio
Kentucky
Tennessee
Arkansas
Louisiana
Mis
siss
ippi
Alabama Georgia
Florida
South Carolina
North Carolina
VirginiaW
est
Virgin
ia
Pennsylvania
New York
MaineNew Hampshire
Vermont
Mass.
RhodeIsland
Connecticut
New Jersey
Delaware
Maryland
Puerto RicoAlaska
Hawaii
Business OpportunityStates RequiringFranchisor Filing IfNo U.S. RegisteredTrademark
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If Franchisor:
1. has a US trademark registration, and2. does not guaranty success or promise refunds
if franchisees are not happy and,3. it qualifies for an FTC Rule Exemption
Only 3 state business opportunity laws require disclosure.
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Washington
Montana
Oregon
Idaho
Nevada
California
Wyoming
Utah
Arizona
Colorado
New Mexico
Oklahoma
Texas
Kansas
Nebraska
South Dakota
North DakotaMinnesota
Iowa
Missouri
Wisconsin
Michigan
Illinois IndianaOhio
Kentucky
Tennessee
Arkansas
Louisiana
Mis
siss
ippi
Alabama Georgia
Florida
South Carolina
North Carolina
Virginia
Wes
t
Virgin
ia
Pennsylvania
New York
MaineNew Hampshire
Vermont
New Jersey
Delaware
Maryland
Puerto RicoAlaska
U.S. Virgin Islands
Oklahoma
Texas
UtahCalifornia
Nebraska
Washington
States Requiring Franchise Registration and/or Disclosure
Hawaii
Business Opportunity States WhichRequire Exempt Franchisors toProvide Disclosure
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So, if you qualify for an exemption but do not have a US registered trademark you may grant franchises without disclosure in the “white States.
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Washington
Montana
Oregon
Idaho
Nevada
California
Wyoming
Utah
Arizona
Colorado
New Mexico
Oklahoma
Texas
Kansas
Nebraska
South Dakota
North DakotaMinnesota
Iowa
Missouri
Wisconsin
Michigan
Illinois IndianaOhio
Kentucky
Tennessee
Arkansas
Louisiana
Mis
siss
ippi
Alabama Georgia
Florida
South Carolina
North Carolina
Virginia
Wes
t
Virgin
ia
Pennsylvania
New York
Maine
New Hampshire
Vermont
New JerseyDelaware
Maryland
Puerto RicoAlaska
U.S. Virgin Islands
BusinessOpportunity StatesRequiring Franchisor Filing If NoU.S. Registered Trademark
Oklahoma
Texas
UtahCalifornia
Nebraska
Washington
States Requiring Franchise Registration and/or Disclosure
Hawaii
Business Opportunity States WhichRequire Exempt Franchisors to Provide Disclosure
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With a US trademark registration • A franchisor must register in the “yellow” states;
and disclose in the “blue” state
• In 32 states no disclosure or registration is required (although a few exemption notices may be required).
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Washington
Montana
Oregon
Idaho
Nevada
California
Wyoming
Utah
Arizona
Colorado
New Mexico
Oklahoma
Texas
Kansas
Nebraska
South Dakota
North DakotaMinnesota
Iowa
Missouri
Wisconsin
Michigan
Illinois IndianaOhio
Kentucky
Tennessee
Arkansas
Louisiana
Mis
siss
ippi
Alabama Georgia
Florida
South Carolina
North Carolina
Virginia
Wes
t
Virgin
ia
Pennsylvania
New York
MaineNew Hampshire
Vermont
New Jersey
Delaware
Maryland
Puerto RicoAlaska
U.S. Virgin Islands
Oklahoma
Texas
UtahCalifornia
Nebraska
Washington
States Requiring Franchise Registration and/or Disclosure
Hawaii
Business Opportunity States WhichRequire Exempt Franchisors toProvide Disclosure
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State Franchise
Registration
No law changes since Amended Rule release,
but
Only the FDD may be used for disclosures. FTC interpretations of
FDD disclosure requirements should increase consistency of state
reviews.
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Litigation Fear
•Not addressed by FTC Rule
•Most small franchisors do not have litigation
•Leegin decision of US Supreme Court allowing vertical price fixing claims to be evaluated under a “rule of reason” may reduce
franchise “price fixing claims”
No material threat of franchise legislation exists
•Rhode Island enacted a franchise relationship law in 2007, the first state to do in 15 years.
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The FTC Welcomes You to the USA
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Thank you
Carl E. ZwislerHaynes and Boone, LLP
1615 L Street, NW, Suite 800Washington, DC 20036-5610
Telephone 202-654-4540Facsimile 202-654-4270
