Ongoing Legal Compliance for Your Franchise Explained
Ongoing Legal Compliance for your Franchise Explained
Your franchise has launched, and you are actively marketing and selling to franchisees in compliance with all applicable laws. There is no more need for legal advice or so you think. However, under federal and state franchise laws, there are ongoing registration and filing obligations. These include the following:
Annual Franchise Disclosure Document (FDD) Updates Federal law requires that the FDD be updated annually within 120 days after the franchisor’s fiscal year end. In addition, some states have their own FDD update deadlines. If you offer franchises in those states, you must comply with both federal and state law.
Franchisors should stop using their existing FDD by the 120th day after the end of their fiscal year and prior to the expiration of the registration in any state with a different update deadline. Generally, once the new FDD is issued, franchisors should assume they need to provide the new FDD to prospects who received the old document but did not purchase before updating the FDD. They must also wait the required waiting period after providing the FDD before closing the sale.
Amendments to the FDD
Federal and some state laws also require franchisors to amend their FDD if there has been a material event or material change. What constitutes materiality 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. Whether something is a material change is determined from the point of view of the franchisee.
Examples of a material change may include a change in the franchisor’s ownership, corporate name or state of incorporation; reorganization of the franchise company; a lawsuit against the franchisor which may have a negative effect on its financial condition; or a change in franchise fees.
Under federal law, the franchisor must update the FDD with any material changes within a reasonable time following the end of each calendar quarter. However, states may have a different period. As with the annual updates to the FDD, generally, franchisors should provide the amended FDD to prospects who received the old document but did not purchase the franchise prior to the event requiring the amendment and then wait the required waiting period before closing the sale. If the material change relates to the financial performance representations made in Item 19, the franchisor must immediately notify prospective franchisees of the material change. If a material event has occurred and the franchisor is in the process of updating or registering the FDD, best practice is to speak to an attorney before taking further steps to close sales in the pipeline.
State Franchise Filings
In states where franchisors are required to register their FDD prior to selling a franchise within that state, they must also renew and update their registration at least annually. In states where registration is not needed, franchisors may need to file a notice with the state, which may include both initial notice as well as annual state franchise filings. There are several states which do not require either registration or filing of a notice.
Exemptions from Registration
Certain states provide exemptions from registration for specific types of franchisors or franchisees based on their size, wealth, experience or sophistication. However, franchisors must take care in applying for exemptions since they differ by state. A particular transaction may be exempt in one place but not another.
Whether you are a new franchisor or an existing franchise company looking to expand into more states, consulting an experienced franchise attorney regarding filing and exemption requirements can save significant time and money.
Julie Lusthaus represents franchisors, franchisees and independent business owners. To learn more, visit her website at https://lusthausfranchiselaw.com/