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So you want to franchise your business… Part 3 of 4

On Behalf of | Oct 19, 2018 | Firm News

Part 1 of this blog series addressed business issues to consider in deciding whether to franchise your business and preparations to be made before launching a franchise program. Part 2 of this blog series addressed preparation of the legal documents required under federal and state franchise law – the Franchise Agreement and the Franchise Disclosure Document. This blog addresses state registration of franchises.

In addition to the federal franchise law that requires that you provide certain disclosures to prospective franchisees in every state, there are 14 states, which are referred to as franchise registration states, that require that a franchisor obtain a franchise registration with the state before offering and selling franchises in that state or to its residents. Franchise Disclosure Documents submitted to the franchise registration states must comply with the federal franchise disclosure requirements in the Amended FTC Rule and the North American Securities Administrators Association, Inc. (“NASAA”) 2008 Franchise Registration and Disclosure Guidelines.

The following 4 states require only that a notice or application and fee (ranging from $250 to $500 for initial applications) be filed with the state agency along with a copy of the Franchise Disclosure Document (except for Michigan):

Indiana Michigan South Dakota Wisconsin

The franchise registrations in these 4 states are effective upon the date of filing in the state.

The following 10 states require the payment of a fee (ranging from $250 to $750 for initial applications), and the filing of a registration application and the Franchise Disclosure Documents. Except for Hawaii, a franchisor cannot offer and sell a franchise in these states until the application and FDD have been reviewed and approved by the state regulator and a registration issued by the state.

California Hawaii Illinois Maryland Minnesota

New York North Dakota Rhode Island Virginia Washington

State franchise regulators may require that certain changes be made to the Franchise Disclosure Document before a registration is issued. These may be changes specific to the franchise laws of the state or based on the franchise regulator’s assessment that the franchisor’s Franchise Disclosure Document does not comply with the Amended FTC Rule or the NASAA Guidelines. Any deficiencies in the Franchise Disclosure Document will be cited in a comment letter issued by the state regulator and must be addressed by the franchisor by submitting to the regulator changes to the Franchise Disclosure Document before a registration will be issued. Depending on the state and the time of year, it may take two weeks to two months (or longer) to receive a response to the application from a franchise registration, and may take longer to resolve any cited deficiencies.

As a new franchisor, you are cautioned that you cannot conduct any franchise sales activities in the franchise registration states before a franchise registration is effective. This would include any advertising or promotion of the franchise opportunity in the state, having any discussions about the purchase of a franchise with residents of the state, and/or sending any information or materials about the franchise opportunity into the state.

The state franchise registration process is not a one-time event. As a franchisor offering and selling in a franchise registration state, you must renew your franchise registration each year. You also have an ongoing obligation to amend the Franchise Disclosure Document and file an amendment application when materials changes to the information in the Franchise Disclosure Document occur during the registration year.

Part 4 of this blog series will address selling franchises in compliance with federal and state franchise law.