Once a franchisor decides to offer franchises, it is subject to various federal and state laws. Federal law establishes certain minimum disclosure standards for franchisors, but states can also supplement those with additional registration and filing obligations. This adds extra complexity for franchise companies, particularly if they operate in multiple states because regulations can vary extensively by state. If you are a franchisor, Lusthaus Law can help you comply with all applicable state franchise filings and Franchise Disclosure Document (FDD) updates.
Annual FDD updates
Franchisors must prepare a Franchise Disclosure Document (FDD) under federal law. The FDD must be updated annually within 120 days after the franchisor’s fiscal year end. In addition, federal and some state laws, also require franchisors to amend their FDD if there has been a material event or material change. What constitutes a material change varies by state, but generally, it would be a fact, circumstance, or condition that would have a substantial likelihood of influencing the franchisee’s conduct or decisions.
Note that materiality is determined from the point of view of the franchisee. Examples of a material change may include a lawsuit against the franchisor for fraud, loan default or a change in the franchisor’s ownership.
State franchise filings: registration, renewals and updates
Some states require franchisors to register their FDD prior to selling a franchise within that state as well as renew and update their registration at least annually. In other states, no registration is needed, but franchisors must file a notice with the state, which may include both initial notice as well as annual filings. There are several states which do not require either registration or filing of a notice
The annual renewal process may be time-consuming and complex depending on the state. Franchisors may be required to provide audited financial statements as well as other information as part of the
State exemptions from registration
Some states allow franchisors to avoid preparing and providing disclosures and filing and registering disclosure documents if they fall within certain exemptions. Many of these exemptions are based on a franchisor’s size, experience, and/or net worth. The rationale is that an experienced franchisor is less likely to violate franchise sales laws and has the financial resources to be held accountable if they do.
Other exemptions focus on the size, wealth, experience or sophistication of the franchisee. Here the rationale is that a large and knowledgeable franchisee does not necessarily need the protection of the franchise laws which were designed to protect small owners.
Franchisors must take care in applying for exemptions. A particular transaction may be exempt under federal law but not state law and vice versa. Consulting an attorney regarding filing and exemption requirements can save a franchisor time and money.
Whether you are a new franchisor or an existing franchise company looking to expand into more states, Lusthaus Law can help you navigate the complex federal and state rules. Contact us for a consultation today.