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How the Amended FTC Franchise Rule Knocks Down Barriers to Franchising Into the USA

How the Amended FTC Franchise Rule Knocks Down Barriers to Franchising Into the USA. by: Carl E. Zwisler Haynes and Boone, LLP. October 4, 2007. First Personal Meeting. UFOC. State Franchise Registration. US GAAP Audited Financial Statements. 5 Business Day Closing Delay. Litigation Fear.

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How the Amended FTC Franchise Rule Knocks Down Barriers to Franchising Into the USA

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  1. How the Amended FTC Franchise Rule Knocks Down Barriers to Franchising Into the USA by:Carl E. ZwislerHaynes and Boone, LLP October 4, 2007

  2. First Personal Meeting UFOC State Franchise Registration US GAAP Audited Financial Statements 5 Business Day Closing Delay Litigation Fear

  3. UFOC • Unimaginably Frustrating for Overseas Companies • Unfortunately, Few Overcome Cost (of compliance) • Unusually Fulfilling (for wallets) of Overseas Counsel • Uniform Franchise Offering Circular

  4. UFOC Since 1979, no franchise may be sold unless prospective franchises received a Uniform Franchise Offering Councilor (UFOC) disclosure UFOC Contains: • 22 items of disclosure • List of all franchisees • Copies of agreements • Franchisor financial statements • Earnings claims (if made)

  5. Global First Personal Meeting Etiquette

  6. Franchisee UFOC Franchisor US Franchise First Personal Meeting Etiquette

  7. First Personal Meeting • UFOC Must be presented to a prospective franchise at First Personal meeting • A meeting to discuss the sale or possible sale of a franchise. • Without a UFOC to present, no sales discussions are permitted with prospective franchisee.

  8. State Franchise Registration In 13 states, no franchise may be offered until UFOC is approved by a state agency. One state requires filing, but no registration. One state requires disclosure, but not filing or registration

  9. Washington New Hampshire Montana Maine North Dakota Vermont Minnesota Oregon Mass. Wisconsin Idaho Michigan South Dakota New York Wyoming Rhode Island Iowa Nevada Pennsylvania Connecticut Nebraska Ohio New Jersey Illinois Indiana Utah West Virginia Delaware Colorado Virginia Kansas Maryland California Missouri Kentucky North Carolina Tennessee Oklahoma Arizona South Carolina Arkansas New Mexico Mississippi Alabama Georgia Texas Louisiana Florida Hawaii States Requiring Franchise Registration and/or Disclosure Alaska Puerto Rico

  10. State Franchise Registration In 26 states, some franchisors must comply with state business opportunity sales laws.

  11. Rhode Washington Washington Island New Hampshire Maine North Dakota Vermont Montana Minnesota Oregon Mass. Wisconsin West Virginia Idaho South Dakota New York Michigan Wyoming Iowa Connecticut Nevada Pennsylvania Nebraska Nebraska Ohio New Jersey Indiana Illinois Utah Utah Delaware South Colorado California California Carolina Kansas Maryland Missouri Virginia Kentucky North Carolina Tennessee Oklahoma Oklahoma Arizona Arkansas New Mexico Mississippi Alabama Georgia Texas Texas Louisiana Florida Hawaii Business Opportunity Laws Franchise Registration and/or Disclosure Laws Alaska Puerto Rico U.S. Virgin Islands Business Opportunity and Franchise Registration and/or Disclosure Laws Franchise Registration/Disclosure and Business Opportunity States

  12. The Count “Counting can be lots of fun when you start with number 1”.

  13. US GAAP Audited Financial Statements • UFOC must include 3 years financial statements audited under, US Generally Accepted Accounting Principles. • Foreign audits are not acceptable

  14. 5 Business Day Closing Delay • Franchisees must review complete final versions of • Franchise Agreements • Related Agreements • 5 Business Days before signing • If negotiations occur at a closing which benefit franchisor, closing must be delayed 5 business days.

  15. Fear of Litigation “Complaint” Your Franchise v. You Lawyer Franchisor

  16. Litigation Fear US franchisees are reputed to sue franchisors whenever they are unhappy with their investments.

  17. The Problem • All franchisors must provide • All prospective franchisees • A UFOC • Containing US GAAP Audited Financial Statements • At the First Personal Meeting • Must first register the franchise in states with jurisdiction over the franchise offer Problem = +

  18. The Amended FTC Rule Eliminates or Mitigates most Barriers.

  19. Eliminates Issue Mitigates Issue First Personal Meeting UFOC State Franchise Registration US GAAP Audited Financial Statements 5 Business Day Closing Delay Litigation Fear

  20. First Personal Meeting 5 Business Day Closing Delay New Rule: Deliver FDD at least 14 days before signing Franchise Agreement or accepting payment. New Rule: No additional cooling off period, Unless franchisor UNILATERALLY changes terms of agreement from what was disclosed.

  21. RIP UFOC 1974 - 2008 Now “UFOC” is “FDD” (Franchise Disclosure Document)

  22. UFOC Franchisee Franchisor No more First Personal Meeting Requirement

  23. Required disclosures may be delivered electronically. • US GAAP requirement waved if US SEC approves use of Franchisor’s country’s GAAP for US securities reporting • Affiliate may be established to franchise in US and, absent parent’s formal agreement to provide services to franchisees or to guaranty franchisor’s financial performances, only franchisor affiliate statements require US GAAP audit.

  24. UK Franchisor US GAAP Audit UK Parent US GAAP Audit or US Franchisee US Franchisor Subsidiary US Franchisee

  25. If Franchisor has not offered franchises in US, no audit required for first year of franchise offers* --Phase in over 3 years * Not applicable in franchise registration states.

  26. In states where registration or disclosure is not required, 3 new exemptions ABOLISH DISCLOSURE REQUIREMENTS!!

  27. Exemptions $ 1 Million initial investment $1 Million includes investment in multiple franchises under: Area Development and Master Franchise Agreements. • $1 Million does not include: • Amounts financed by the franchisor and its affiliates. • Investments in unimproved real property (“raw land”)

  28. Exemptions Continued $5 Million net worth and 5 years business experience of franchisee, its parent or affiliates. 5+5

  29. Exemptions Franchise Officers, Managers and Owners • If Franchisor or one or more of its officers, directors, general partners, owners, or managers… • Owns at least 50% of prospective franchisee, the sale is exempt. • officers, or managers, etc. must have been associated with the franchisor for at least 2 years. • have continued the association with the franchisor until 60 days before the franchise sale. • owners must own at least 25% interest in franchisor and have had such interest for at least 2 years up to 60 days before sale.

  30. If a franchisor can qualify for an exemption, how can it deal with state law issues?

  31. Avoid all states with a franchise registration or disclosure law.

  32. Qualify for exemptions from state business opportunity laws by obtaining a US trademark registration

  33. Washington New Hampshire Montana Maine North Dakota Vermont Minnesota Oregon Mass. Wisconsin Idaho South Dakota New York Michigan Wyoming Rhode Island Iowa Nevada Pennsylvania Connecticut Nebraska Ohio New Jersey Illinois Indiana Utah West Virginia Delaware Colorado Virginia Kansas Maryland California Missouri Kentucky North Carolina Tennessee Oklahoma Arizona South Carolina Arkansas New Mexico Mississippi Alabama Georgia Texas Louisiana Florida Hawaii Business Opportunity States Requiring Franchisor Filing If No U.S. Registered Trademark Alaska Puerto Rico

  34. If Franchisor: • has a US trademark registration, and • does not guaranty success or promise refunds if franchisees are not happy and, • it qualifies for an FTC Rule Exemption Only 3 state business opportunity laws require disclosure.

  35. Washington Washington New Hampshire Maine North Dakota Vermont Montana Minnesota Oregon Wisconsin Idaho South Dakota New York Michigan Wyoming Iowa Nevada Pennsylvania Nebraska Nebraska West Virginia Ohio New Jersey Indiana Illinois Utah Utah Delaware Colorado California California Kansas Maryland Missouri Virginia Kentucky South Carolina North Carolina Tennessee Oklahoma Oklahoma Arizona Arkansas New Mexico Mississippi Alabama Georgia Texas Texas Louisiana Florida Hawaii States Requiring Franchise Registration and/or Disclosure Alaska Puerto Rico Business Opportunity States Which Require Exempt Franchisors to Provide Disclosure U.S. Virgin Islands

  36. So, if you qualify for an exemption but do not have a US registered trademark you may grant franchises without disclosure in the “white States.

  37. Washington Washington New Hampshire North Dakota Vermont Montana Maine Minnesota Oregon Wisconsin Idaho South Dakota New York Michigan Wyoming West Virginia Iowa Nevada Pennsylvania Nebraska Nebraska Ohio Indiana Illinois New Jersey Utah Utah Delaware Colorado California California Kansas Maryland Missouri Virginia South Carolina Kentucky North Carolina Tennessee Oklahoma Oklahoma Arizona Arkansas New Mexico Mississippi Alabama Georgia Texas Texas Louisiana Florida Hawaii Business Opportunity States Requiring Franchisor Filing If No U.S. Registered Trademark Alaska States Requiring Franchise Registration and/or Disclosure Puerto Rico U.S. Virgin Islands Business Opportunity States Which Require Exempt Franchisors to Provide Disclosure

  38. With a US trademark registration A franchisor must register in the “yellow” states; and disclose in the “blue” state In 32 states no disclosure or registration is required (although a few exemption notices may be required).

  39. Washington Washington New Hampshire Maine North Dakota Vermont Montana Minnesota Oregon Wisconsin Idaho South Dakota New York Michigan Wyoming Iowa Nevada Pennsylvania Nebraska Nebraska West Virginia Ohio New Jersey Indiana Illinois Utah Utah Delaware Colorado California California Kansas Maryland Missouri Virginia Kentucky South Carolina North Carolina Tennessee Oklahoma Oklahoma Arizona Arkansas New Mexico Mississippi Alabama Georgia Texas Texas Louisiana Florida Hawaii States Requiring Franchise Registration and/or Disclosure Alaska Puerto Rico Business Opportunity States Which Require Exempt Franchisors to Provide Disclosure U.S. Virgin Islands

  40. State Franchise Registration No law changes since Amended Rule release, but Only the FDD may be used for disclosures. FTC interpretations of FDD disclosure requirements should increase consistency of state reviews.

  41. Litigation Fear • Not addressed by FTC Rule • Most small franchisors do not have litigation • Leegin decision of US Supreme Court allowing vertical price fixing claims to be evaluated under a “rule of reason” may reduce franchise “price fixing claims” • No material threat of franchise legislation exists • Rhode Island enacted a franchise relationship law in 2007, the first state to do in 15 years.

  42. The FTC Welcomes You to the USA

  43. Thank you Carl E. Zwisler Haynes and Boone, LLP 1615 L Street, NW, Suite 800 Washington, DC 20036-5610 Telephone 202-654-4540 Facsimile 202-654-4270 carl.zwisler@haynesboone.com

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