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Franchise disclosure and regulation (pre-2007/8)

See also the amended FTC rule

Franchising is subject to many regulations, including:

Federal Trade Commission ("FTC") "Rule"

The Federal Trade Commission ("FTC") "Rule" defines a "franchise" and requires "disclosure" of information deemed important to prospective franchisees in making a decision to purchase a franchise.

The FTC rule often defines operations not anticipated to be a "franchise" as such, and provides that a franchise exists where:

  1. the franchisee sells goods or services meeting the franchisor's quality standards or which are identified by the franchisor's mark
  2. the franchisor exercises significant control or gives significant assistance in the method of operations
  3. the franchisee is required to pay $500 or more to the franchisor or an affiliate within 6 months of opening

or

  1. the franchisee sells goods or services supplied by the franchisor or an affiliate
  2. the franchisor assists in securing accounts, or locations or sites for vending machines or rack displays, or provides the services of person able to do either
  3. the franchisee is required to pay $500 or more to the franchisor or an affiliate within 6 months of opening

The FTC Rule requires a specific format in making the required disclosure and applies in all states, but the Rule is also satisfied by the alternate "Uniform Franchise Offering Circular" ("UFOC") format, which is specified by a national group of regulatory agency representatives. All registration states require the UFOC format, so most franchisors use the UFOC format. The disclosure document must be updated at least annually within 90 days of the end of franchisor's fiscal year, and also must be amended to disclose any material changes between annual registrations.

Required disclosure items

Some of the required disclosure items include information on:

Business Opportunity Laws

Some states have "Business Opportunity Laws" (see also the proposed new FTC business opportunity rule), which typically apply where the seller:

State registration and disclosure

A number of individual state laws require disclosures, and some require state registration. The registration process can range from a thorough review of the disclosure document to a mere "notice" filing with no review.

Franchise relationship regulation

Some states regulate the franchise relationship itself, e.g. requiring:

Not all states regulate the franchise relationship, or even if a state does, the regulation may be minimal, e.g., Missouri merely requires 90 days prior notice of termination, but does not require that termination be "for cause", etc.