Initial
Registration
For new and existing franchise systems,
registration states can create a headache if the registration process is not
handled correctly. The process can be time consuming and expensive, especially
if not handled correctly the first time.
There are 14 registration states: California,
Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota,
Rhode Island, South Dakota, Virginia, Washington and Wisconsin. The initial
registration fees vary from $125 to $750. In each of these 14 states, a
franchisor must not only comply with the FTC Disclosure Rule, but must also
comply with the individual state rules which often impose additional disclosures
and restrictions on the franchisor. Simply put, if you are interested in taking
your franchise system into one of the above 14 states, you are restricted from offering or selling to
either an individual residing in that state, or to an outside individual
looking to franchise within that state.
As a baseline, all franchisors must comply
with the FTC Disclosure Rule and have appropriate and compliant documents
before offering or selling a franchise. From there, a franchisor can add state-specific
addenda or create a state-specific FDD for registration purposes.
Depending on the registration state,
registration is either immediate (meaning once the state receives the FDD
packet and required documentation, the franchisor can begin to offer and sell
in that state) or the registration will take time, after an examiner has
reviewed all the provided documents to make sure they are compliant with state
law. Often a state examiner will provide the franchisor with a list of issues
that need to be addressed and corrected (a “Comment Letter”) before the state
can register the franchise for offers and sales.
Renewal
Once a franchise is registered in a state,
that registration is generally effective for a one-year period, after which the
franchise must be renewed, for a fee, in that state in order for the franchisor
to continue to offer or sell there. However, not all registration states count
this “year” in the same way. Some states have an expiration one year from the
date of registration. Other states have an expiration date of 90-120 days from
the end of the franchisor’s fiscal year end. Your registration letter will
provide the date of expiration. You should calendar this date and be aware that
it might be sooner than expected.
Renewal is also required in all
non-registration states. The difference is that once the disclosure documents
have been updated (including an updated audit) then the franchisor can
generally begin offering and selling franchises in non-registration states.
(The one caveat here is that if the state is a business opportunity state, you
must make sure you file the appropriate exemption before selling in that
state.)
Exemptions from Registration
Both the FTC and Registration States provide limited
exemptions to registration. These vary from state to state. In most instances,
the exemption only removes the registration requirement, not the disclosure
requirement. You will still need to have accurate and up to date documents, and
to comply with the timelines for disclosure.
If you are looking at taking your franchise
system into a registration state, you should speak with a knowledgeable
franchise attorney to ensure compliance with state-specific laws and
regulations.
