Registration

AuthorJoseph J. Fittante, Jr. and Suzanne Trigg
Pages141-181
141
Registration
CHAPTER 4
Joseph J. Fittante, Jr. and Suzanne Trigg
Contents
I. Overview of State Regulation of Franchise Sales . . . . . . . . . . . . . . . 143
A. Jurisdictional Scope of State Franchise Registration and
Disclosure Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4
B. Exemptions from State Franchise Registration Requirements . . 146
C. North American Securities Administrators Association, Inc.’s
Effect on the Registration Process . . . . . . . . . . . . . . . . . . . . . . . 148
II. Registering a Franchise Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
A. When to File . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
1. Initial Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
2. Renewal Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
3. Amendment Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
B. The Filing and Registration Process . . . . . . . . . . . . . . . . . . . . . . 152
1. The Franchise Application . . . . . . . . . . . . . . . . . . . . . . . . . . 1 52
2. Electronic Filing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
3. Use of a Multi-State FDD in the Registration Process . . . . . 154
C. Working with State Franchise Examiners . . . . . . . . . . . . . . . . . 155
D. Registration of Multi-Unit Franchise Offerings . . . . . . . . . . . . . 1 57
III. Other Registration Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
A. Compliance with Business Opportunity Laws . . . . . . . . . . . . . . 159
B. Registration of Salespersons . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
C. Filing of Advertising and Promotional Materials . . . . . . . . . . . . 161
D. Satisfying Financial Assurance Requests . . . . . . . . . . . . . . . . . . 164
1. Deferral of Payment of Initial Fees . . . . . . . . . . . . . . . . . . . 166
2. Escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
3. Surety Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
4. Guaranty of Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 68
5. Capital Infusion/Debt Conversion . . . . . . . . . . . . . . . . . . . . 169
E. Agents for Service of Process . . . . . . . . . . . . . . . . . . . . . . . . . . 169
142 Fundamentals of Franchising
Fifteen states, commonly known as the “registration states,” require a franchisor
to register its franchise offering with the appropriate state agency before mak-
ing any offers or sales in the state, unless the offering is exempt from registra-
tion. Twenty-five states have business opportunity laws, and franchisors may
be required to submit a filing in some or all of these states to comply with these
laws. This chapter provides an overview of these requirements and the conse-
quences for failure to comply.
IV. Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
A. Remedies Under State Registration and Disclosure Laws . . . . . 170
1. Civil Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
2. Administrative Enforcement . . . . . . . . . . . . . . . . . . . . . . . . 172
3. Criminal Penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
Chapter 4 Registration 143
1. 16 C.F.R. PT. 436.
2. CAL. CORP. CODE §§ 31000-516.
3. HAW. REV. STAT. §§ 482E-1 to -12; 85 ILL. COMP. STAT. 705/1 to 44; IND. CODE §§ 23-2-
2.5-1 to -51; MD. CODE ANN., BUS. REG. §§ 14-201 to -233; MICH. COMP. LAWS §§ 445.1501-
.1546; MINN. STAT. §§ 80C.01-.30; N.Y. BUS. LAW §§ 680-695; N.D. CENT. CODE §§ 51-19-01 to
-17; R.I. GEN. LAWS §§ 19-28.1-1 to -34; S.D. CODIFIED LAWS §§ 37-5B-1 to -53; VA. CODE A NN.
§§ 13.1-557 to -574; WASH. REV. CODE §§ 19.100.010-.940; WIS. STAT. §§ 553.01-.78; see also,
Chapter 3, Section IV.A. Further, Oregon does not require registration but does require dis-
closure and certain record-keeping requirements. ORE. REV. STAT. §§ 650.005 et seq.
4. 16 C.F.R. § 436.7; see Section II.A. infra, discussing amendments and renewals and
what constitutes a “material change.”
I. Overview of State Regulation
of Franchise Sales
As discussed earlier in this book, the FTC Rule, as amended (the Amended
Rule)1 requires a franchisor to make certain pre-sale disclosures before selling a
franchise. However, the registration states require not only pre-sale disclosure,
but also registration of the franchise offering with a state before the franchisor
may lawfully make any offers or sales in that state. California was the first state
to require franchise registration, beginning in 1970.2 Not to be outdone, Hawaii,
Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode
Island, South Dakota, Virginia, Washington, and Wisconsin followed suit.3 These
states, along with California, are commonly referred to as the “franchise regis-
tration states” or “registration states.”
To register a franchise offering, counsel must be familiar with the varied
state laws and regulations that govern this process. For example, most, but not
all, registration states require the filing of the Franchise Disclosure Document
(FDD) as a part of the registration application. Many, but not all, require the
FDD to include, usually in addendum form, certain disclosures required by state
law. Some, but not all, of the registration states also review the FDD and exhibits
to confirm they meet the requirements of the state and, if not, will issue com-
ment letters that must be addressed before registration by the state.
Once an offering is registered, a franchisor must amend its registration
any time a “material” change occurs in the information on file with the appli-
cable state agency. Although states vary on how quickly the amendment must
be completed, it should be done as soon as reasonably practical after the mate-
rial change. Under the Amended Rule, an FDD must be updated within a rea-
sonable time after the end of the fiscal quarter in which the material change
occurs, unless the material change is to information contained in Item 19, in
which case the amendment must occur immediately.4

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