Franchises in Illinois are governed by both federal and state law. With respect to the sale of franchises, Illinois imposes numerous requirements to ensure that potential franchisees understand the implications of their investment. Illinois franchise law and registration requirements are complex, particularly when combined with federal laws. Working with a knowledgeable franchise lawyer could help ensure compliance with applicable laws and regulations to avoid costly violations. For example, if renewal isn’t completed within the timeframe provided, it is possible that a franchisor will need to start over and pay a higher initial filing fee.
Franchise Disclosure Documents (FDDs) contain certain required information that franchisors must disclose to potential franchisees. In addition to the required information, the franchisor also has the option to include financial performance representations which can give franchisees an estimate of projected sales or profits. If franchisors do not include this information in their official FDD, they are prohibited from providing this information later.
Under 815 Ill. Comp. Stat. §705/16, the FDD should be prepared in accordance with the guidelines of the North American Securities Administrators Association. The FDD must be delivered to prospective franchisees at least 14 days before the execution of a franchise agreement or 14 days before receipt of any consideration such as the initial franchise fee, whichever occurs first. In addition, Illinois franchise statutes and registration provisions require the disclosure statement to be submitted to the state government as part of the franchise registration process.
The Franchise Bureau in the Illinois Office of the Attorney General oversees the operation and sale of franchises in the state. It is prohibited for a franchisor to sell a franchise opportunity unless:
A franchise law and registration attorney could determine whether a particular transaction requires franchise registration and help the franchisor navigate this new direction for their business. When registration is required, franchisors must pay a $500 fee and submit the FDD with a franchise registration application form, sales agent disclosure forms, an auditor’s consent, a service of process form, and certain other required documents to the Illinois Franchise Bureau (500 S. Second Street, Springfield, IL 62706). Additionally, an extra copy of the registered Franchise Disclosure Document may need to be submitted within a one-month time frame after registration.
Each year a renewal application must be filed with the State before the previous registration expires in order to be accepted. To file a renewal application, a franchisor must submit:
If these documents are not filed before the registration date expiration (120 days after the franchisors fiscal year-end) then the franchisor will have to file a new initial registration with the initial registration fee.
As part of the Illinois Franchise Registration Disclosure Act, state lawmakers included provisions governing the relationship between franchisors and franchisees. Franchisors are not allowed to discriminate between franchisees in Illinois in the charges for franchise fees, royalties, goods, services, equipment, and other provisions if such discrimination would cause competitive harm. Exceptions may be made for franchises granted at different times or those involving programs to help franchisees with insufficient capital, experience, or education. Illinois franchise laws also restrict termination or non-renewal of a franchise.
Failure to register your franchise with the State of Illinois before selling a franchise can result in severe consequences. The state may institute civil penalties, order rescission of the franchise agreement and compensation to the franchisee, or institute criminal prosecution under certain circumstances. Along with these legal issues, the failure to register a franchise in Illinois before the sale could result in a private lawsuit from the franchisee for various issues that could result in massive financial losses for the franchisor.
Compliance with franchise registration and other Illinois franchise laws can be challenging. Besides the initial registration, franchises are required to renew their registrations annually if they want to continue selling franchises in Illinois. If a state examiner decides that the franchise company lacks sufficient capital and equity, they may impose financial assurance requirements before accepting franchise disclosure document registration. Franchisors who do not meet the financial requirements must often agree to either (i) defer initial franchise fees, (ii) put the franchise fees into escrow, (iii) post a surety bond, (iv) post a Certificate of Deposit, or (v) provide a Guarantee of Performance from another individual, partnership or corporation whose financial statements demonstrate the ability to perform the franchisor’s obligations.
Guidance from an experienced franchise lawyer can help ensure compliance with Illinois franchise law and registration. Consult an experienced franchise legal team today to start building your franchise network in Illinois.