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In general, selling and offering a franchise is regulated by state and federal franchise laws. Registering a franchise impacts the sale and offer of a franchise, so it is important to know when registration is required. In North Dakota, franchisors are required to register before offering and selling franchises. Having to register before offering and selling a franchise can be frustrating for a franchisor because registration can take a long time and be expensive. As a result, franchisors are often stuck waiting for a registration to finalize, when they can be offering and selling their franchise.
Luckily, North Dakota has several exemptions from registration. These exemptions can be based on the different types of transactions or can be based on the characteristics of franchisors and potential franchisees. If one of these exemptions apply, then franchisors can avoid the registration process and sell their franchise a lot sooner.
The seasoned franchisor exemption is available to franchisors if they meet certain net worth and experience standards. For example, McDonald’s does not have to register in most states because it meets the net worth and experience standards. The net worth standard in North Dakota is $10 million or $1 million if the parent company has a net worth of $10 million. N.D. Cent. Code Ann. § 51-19-04(1)(a). The experience standard requires franchisors to have at least 25 franchisees in the same business during the 5 years immediately before the sale. N.D. Cent. Code Ann. § 51-19-04(1)(b).
The sale by existing franchisee exemption is available to franchisors when the franchisor is not involved in the sale. In other words, the sale must be for the current franchisee’s own account and cannot be affected by or through the franchisor. N.D. Cent. Code Ann. § 51-19-04(2).
The co-op exemption is available to franchisors when non-profit organizations are operated on a cooperative basis by and for its members. There are 8 requirements that the organization must comply with to qualify for the exemption. N.D. Admin. Code 73-03-01-01. Additionally, application of the exemption has been limited to agricultural co-ops by administrative ruling.
An exemption by order depends on a few of things. The Commissioner may exempt a transaction that is not within the purpose of North Dakota franchise law and which the Commissioner finds is not necessary or appropriate in the public interest or for the protection of investors. N.D. Cent. Code Ann. § 51-19-04(3).
Aside from these exemptions, certain transactions are definitionally excluded. If a transaction is excluded, then registration is not required. In North Dakota, renewals of existing agreements and out-of-state sales are excluded.
The renewal of an existing franchise agreement exclusion is available to franchisors that already have agreements with potential franchisees. North Dakota only requires that there be no interruption in the operation of the business. N.D. Cent. Code Ann. § 51-19-02(14)(a)(2).
The out-of-state franchise exclusion is available to franchisors when a state allows them to sell outside the state to non-residents. First, the potential franchisee must not be domiciled in North Dakota. N.D. Cent. Code Ann. § 51-19-02(14)(b). Second, the offer and sale of the franchise must be made entirely outside North Dakota. N.D. Cent. Code Ann. § 51-19-02(14)(b).
Again, if an exemption applies, franchisors can skip the registration process. Keep in mind that these exemptions are specific to North Dakota and can be very different than federal exemptions. Additionally, there are some North Dakota exemptions that may impact disclosures, but not registration, and vice versa. Thus, it is important to consider how federal and state exemptions interact with each other when registering, selling, and offering a franchise.