Offering your business as a franchise opportunity is more complex than it may first appear. The Federal Trade Commission and North Carolina state law require franchisors to provide specific disclosures and contractual terms to potential “franchisee” buyers. This is accomplished by providing a franchise disclosure document (“FDD”) to any party potentially interested in making a franchise purchase.
There are fourteen states that have their own franchise laws. North Carolina is not one of them, but it is one of the twenty-seven states that have “business opportunity” laws. North Carolina’s Business Opportunity Sales Act (“Business Opportunity Act”) can be found in Article 19, Chapter 66 of the North Carolina General Statutes.
N.C. Gen. Stat. §66-97 requires that all “business opportunities” be registered with the North Carolina Secretary of State. However, most franchises are exempt from registration in North Carolina because they involve the licensing of a federal trademark. It is important to understand what exactly a “business opportunity” is under North Carolina law.
The Business Opportunity Act definition of a “business opportunity” includes a “sales or marketing program” that enables the buyer to make income from the business concept. This definition captures “franchising” as a business opportunity under North Carolina law. However, the Business Opportunity Act specifically excludes franchises that involve a federally registered trademark from the definition of a business opportunity.
Therefore, if a franchisor has a registered trademark that they license to their franchisees, they are exempt from registration as a business opportunity in North Carolina. It is very important to note that filing a trademark does not mean that it is registered. After a trademark is filed, it usually takes 6-9 months before the United States Patent and Trademark Office grants registration. During that period, when the trademark has simply been filed, the franchisor must register as a business opportunity in North Carolina. Registering as a business opportunity isn’t that bad. It involves adding a few disclosures to the FDD and paying a $250.00 filing fee to the Secretary of State. This will grant the franchisor registration for one year. Most likely, the franchisor’s trademark will be registered during that time and a business opportunity renewal won’t be necessary.
Our franchise attorneys regularly guide franchisors through the North Carolina business opportunity regulations. We have helped many startup franchisors with their business opportunity registrations. Our attorneys also believe it is a best practice to file a “trademark exemption” notice with the North Carolina Secretary of State. This is a one-time filing, with no modifications to the FDD or filing fee, and it serves as a record with the Secretary of State that a franchisor with a registered federal trademark is compliant with North Carolina law.
As stated above, all franchisors must register as business opportunities with the North Carolina Secretary of State if they are not licensing a registered federal trademark in conjunction with their franchise offering. According to North Carolina General Statutes §66-95, each franchisor offering a business opportunity must provide an FDD that meets the State’s rigorous requirements that are above and beyond the Federal Trade Commission’s standards. In addition to the twenty-three items of the FDD required by 16 CFR §436 (the “Amended Franchise Rule”), North Carolina requires ten specific disclosures. Some of these are met by adhering to the Amended Franchise Rule guidelines for FDDs. However, there are a few specific disclosures that must be added to a separate cover sheet that will be filed with the FDD. The number of additional disclosures can only be determined after reviewing an FDD for its compliance with the Amended Franchise Rule.
If the FDD is compliant with the Amended Franchise Rule and it contains the additional disclosures required by the Business Opportunity Act, then the franchisor may file its business opportunity with the North Carolina Secretary of State. The registration packet must include (1) a cover letter, (2) two copies of the FDD, (3) additional disclosures required by N.C. Gen. Stat. §66-95, (4) a Business Opportunity Sales Consent to Service of Process, and (5) a check for $250.00 made out to the North Carolina Secretary of State. The registration packet should be mailed to the following address:North Carolina Secretary of State
It is also important to note that certain franchise systems are set up in a way that the North Carolina Business Opportunity Sales Act requires some franchisors to secure a surety bond for $50,000.00. This is a very fact-specific requirement, and our franchise attorneys can analyze your franchise structure and FDD to determine whether you are subject to this requirement. Additionally, all franchisors must refile their business opportunity filing annually or sooner if there is a material change in the FDD. Our franchise lawyers regularly guide franchisors through the business opportunity registration process and work with them to maintain compliance under North Carolina law.
A franchisor can only begin selling franchises in North Carolina if it is exempt from registration or if it has filed a complete and proper business opportunity registration. When franchise sales are on the line, it is key to trust an attorney with your registrations and business opportunities. Our franchise attorneys can determine your exempt status or get you filed fast. Let us help you set your franchise up for success in North Carolina.