South Dakota is classified as a filing state, and its laws relating to franchise registration, the offer and sale of franchises, and other aspects of the franchise relationship are codified at S.D. Code §§ 37-5B-1 et seq. (the “Franchise Investment Law”). Under § 37-5B-4, the offer or sale of a franchise in South Dakota is unlawful unless a franchisor has properly filed notice with the Division of Insurance and Securities Regulation of the South Dakota Department of Labor and Regulation (the “Division”), or is exempt from making such a notice filing. Franchisors that are specifically exempt from the filing requirements of the Franchise Investment Law include those involved in a franchise relationship:
For all other types of franchise relationships, a franchisor must comply with the filing requirements set forth below.
The filing requirements for non-exempted franchise relationships are set forth under § 37-5B-5 of the Franchise Investment Law. A proper filing consists of the following:
Because South Dakota only requires “notice filing,” the filing is generally effective upon receipt at the following address:
South Dakota Dept of Labor and Regulation
Division of Insurance
124 S. Euclid Suite 104
Pierre, SD 57501
However, if the Division requires a franchisor to submit additional information, then the filing is effective fifteen days after the additional information is filed and approved. The filing expires one year from its effective date and must be renewed on or before its expiration date. The requirements for renewal are the same as the initial filing, however, the applicable fee is only $150. And importantly, a renewal filing cannot be submitted more than thirty-days prior to the current expiration date.
In addition to its filing requirements, South Dakota also regulates certain aspects of the franchise relationship under the Franchise Investment Law. For example, under § 37-5B-17, in the offer or sale of a franchise in South Dakota, franchisors are required to provide an FDD to a prospective franchisee at least fourteen days before the prospective franchisee signs a binding agreement with, or makes any payment to, the franchisor or an affiliate in connection with the proposed franchise sale. Additionally, if a franchisor unilaterally and materially alters the terms and conditions of any agreement attached to the FDD, including the franchise agreement itself, the franchisor is required to provide a copy of each revised agreement to the prospective franchisee at least seven days before the prospective franchisee signs the revised agreement. However, this does not include changes to agreements that arise out of negotiations initiated by the prospective franchisee.
It is important that franchisors are aware of the substance and effect that complying with state and federal franchise laws has on business operations and relationships. A franchise attorney is an excellent resource to provide clarity to applicable South Dakota franchise laws and filing requirements. Failure to comply could result in penalties and liability in civil actions filed by franchisees, as well as other substantial losses. To help avoid the negative ramifications of these violations, and to ensure compliance on an ongoing basis, contact a seasoned franchise lawyer today and start working on franchising your business.