Franchising is regulated at the federal level by the Federal Trade Commission. However, many states also have their own franchise and business opportunity laws. Franchisors must be compliant with the laws in the state in which they are headquartered and in each state in which they will offer franchises for sale. Our attorneys could help you with overall franchise compliance by explaining the various regulations that your business must follow.
The first step in ensuring franchise compliance is making sure that the business is following the Federal Trade Commission’s Amended Franchise Rule found at 16 C.F.R. §436. In the industry, this is referred to as the “FTC Rule.” The FTC Rule prescribes the exact format and layout of the franchisor’s franchise disclosure document (FDD).
The FTC Rule also regulates how the FDD must be used to sell franchises. For example, a prospective franchisee must have the FDD for a full 14 days before they can sign a franchise agreement or pay any money to the franchisor. The FTC Rule goes into further detail about who must be provided with the FDD and several exemptions for large franchisees and other specific situations. The FTC Rule is complex, and it is only the first step in maintaining compliance for a franchisor.
The second step is to ensure the franchisor is compliant with various state laws. There are 15 states with their own franchise laws, which are often referred to as “Little FTC Acts.” We call these states “registration states” because they require registration in some form before the franchisor can offer franchises for sale within the state. Each of these states’ franchise laws modify the FDD and the terms of the franchise agreement in various ways. Franchisors must ensure they are compliant with these laws in addition to the FTC Rule. Their documents must be compliant, and they must also be aware of registration and renewal requirements.
Most of the registration states have adopted franchise guidelines and commentary from the North American Securities Administrators Association (“NASAA”). NASAA has issued guidelines and additional franchise regulations for over a decade, and their requirements are often stricter than those found in the FTC Rule. Franchisors must be aware of the NASAA guidelines and ensure their FDD and franchise agreement are compliant with the NASAA requirements if they plan on selling franchises within any of the registration states.
Additionally, there are 27 states that have business opportunity laws. These laws regulate “business opportunities,” which, by definition in all of these states, include franchises. However, many of these states exempt franchisors from their business opportunity registration requirements and regulations if the franchisors’ FDD is compliant with the FTC Rule. Still, some of these states have unique registration requirements.
For example, Texas requires franchisors to file a one-page business opportunity exemption notice and pay a one-time $25 filing fee. This form certifies that the franchisor is compliant with the FTC Rule. North Carolina’s business opportunity law only exempts franchisors from registration if they have a federally registered trademark. This means that a franchisor must register and pay a fee to North Carolina even if they are compliant with the FTC Rule if their trademarks are pending or otherwise not registered with the United States Patent and Trademark Office. Franchisors must be careful in navigating the various business opportunity laws across the country and should contact an attorney for help with franchise compliance.
When we draft FDDs for new franchisors, we initially draft them so that they are compliant with the FTC Rule, the registration state Little FTC Acts, and the NASAA guidelines and commentary. This is a best practice as the franchisor’s documents are compliant across all three levels from the beginning. After that, the franchisor can learn how to maintain compliance in its sales program by properly using the FDD and selling franchises. If you need help with franchise compliance with both the FTC rule and state laws, reach out to our team today.