State Franchise Registrations and Filings

State Franchise Registrations and Filings

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.

State Requirements

Every franchisor must prepare a Franchise Disclosure Document (FDD) under federal law regardless of where it will operate. The next step is for franchisors to decide where they want to sell franchises and check the laws in those states to determine whether there are additional legal requirements that must be met before offering franchises in those states. Franchisors should also review the laws of the state in which they are domiciled and the state laws where franchisees are located.

Currently, 13 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 6 states, no registration is needed, but franchisors must file a notice with the state, which may include both initial notice as well as annual state franchise filings. Another 6 states permit franchisors to sell within the state as long as the franchisor has a federally registered trademark. The remaining states do not require either registration or filing of a notice.

While it may seem simple to check the laws of each state, these laws are often complicated. They may vary depending on the location of the franchisor, the franchisee, and/or the business. For example, New York is the only state that distinguishes its requirements based on where the franchisor is located. A franchisor located in New York must comply with New York law as well as the law of the state where it will be selling franchises. However, if a franchisor is located in another state and wants to sell franchises in New York, New York law only requires that the franchisor comply with New York law. As a result of confusing laws, it is essential to consult an experienced franchise attorney regarding compliance with state laws.

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.