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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

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

by:Carl E. ZwislerHaynes and Boone, LLP

October 4, 2007


How the amended ftc franchise rule knocks down barriers to franchising into the usa

First Personal Meeting Franchising Into the USA

UFOC

State Franchise Registration

US GAAP Audited Financial Statements

5 Business Day Closing Delay

Litigation Fear


How the amended ftc franchise rule knocks down barriers to franchising into the usa
UFOC Franchising Into the USA

  • Unimaginably Frustrating for Overseas Companies

  • Unfortunately, Few Overcome Cost (of compliance)

  • Unusually Fulfilling (for wallets) of Overseas Counsel

  • Uniform Franchise Offering Circular


How the amended ftc franchise rule knocks down barriers to franchising into the usa

UFOC Franchising Into the USA

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)


Global first personal meeting etiquette
Global First Personal Meeting Etiquette Franchising Into the USA


Us franchise first personal meeting etiquette

Franchisee Franchising Into the USA

UFOC

Franchisor

US Franchise First Personal Meeting Etiquette


How the amended ftc franchise rule knocks down barriers to franchising into the usa

First Personal Meeting Franchising Into the USA

  • 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.


How the amended ftc franchise rule knocks down barriers to franchising into the usa

State Franchise Registration Franchising Into the USA

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


How the amended ftc franchise rule knocks down barriers to franchising into the usa

Washington Franchising Into the USA

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


How the amended ftc franchise rule knocks down barriers to franchising into the usa

State Franchise Registration Franchising Into the USA

In 26 states, some franchisors must comply with state business opportunity sales laws.


How the amended ftc franchise rule knocks down barriers to franchising into the usa

Rhode Franchising Into the USA

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


The count
The Count Franchising Into the USA

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


How the amended ftc franchise rule knocks down barriers to franchising into the usa

US GAAP Audited Financial Statements Franchising Into the USA

  • UFOC must include 3 years financial statements audited under, US Generally Accepted Accounting Principles.

  • Foreign audits are not acceptable


How the amended ftc franchise rule knocks down barriers to franchising into the usa

5 Business Day Closing Delay Franchising Into the USA

  • 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.


Fear of litigation
Fear of Litigation Franchising Into the USA

“Complaint” Your Franchise v. You

Lawyer

Franchisor


How the amended ftc franchise rule knocks down barriers to franchising into the usa

Litigation Fear Franchising Into the USA

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


The problem
The Problem Franchising Into the USA

  • 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 =

+



How the amended ftc franchise rule knocks down barriers to franchising into the usa

Eliminates Issue Franchising Into the USA

Mitigates Issue

First Personal Meeting

UFOC

State Franchise Registration

US GAAP Audited Financial Statements

5 Business Day Closing Delay

Litigation Fear


How the amended ftc franchise rule knocks down barriers to franchising into the usa

First Personal Meeting Franchising Into the USA

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.


How the amended ftc franchise rule knocks down barriers to franchising into the usa

RIP Franchising Into the USA

UFOC 1974 - 2008

Now “UFOC” is “FDD” (Franchise Disclosure Document)


How the amended ftc franchise rule knocks down barriers to franchising into the usa

UFOC Franchising Into the USA

Franchisee

Franchisor

No more First Personal Meeting Requirement


How the amended ftc franchise rule knocks down barriers to franchising into the usa

  • Required disclosures may be delivered electronically. Franchising Into the USA

  • 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.


How the amended ftc franchise rule knocks down barriers to franchising into the usa

UK Franchisor Franchising Into the USA

US GAAP Audit

UK Parent

US GAAP Audit

or

US Franchisee

US Franchisor Subsidiary

US Franchisee


How the amended ftc franchise rule knocks down barriers to franchising into the usa

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.


How the amended ftc franchise rule knocks down barriers to franchising into the usa

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


Exemptions
Exemptions 3 new exemptions ABOLISH DISCLOSURE REQUIREMENTS!!

$ 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”)


Exemptions continued
Exemptions Continued 3 new exemptions ABOLISH DISCLOSURE REQUIREMENTS!!

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

5+5


Exemptions franchise officers managers and owners
Exemptions 3 new exemptions ABOLISH DISCLOSURE REQUIREMENTS!!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.




How the amended ftc franchise rule knocks down barriers to franchising into the usa
Qualify for exemptions from state business opportunity laws by obtaining a US trademark registration


How the amended ftc franchise rule knocks down barriers to franchising into the usa

Washington by obtaining a US trademark registration

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


If franchisor
If Franchisor: by obtaining a US trademark registration

  • 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.


How the amended ftc franchise rule knocks down barriers to franchising into the usa

Washington by obtaining a US trademark registration

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


How the amended ftc franchise rule knocks down barriers to franchising into the usa

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.


How the amended ftc franchise rule knocks down barriers to franchising into the usa

Washington registered trademark you may grant franchises without disclosure in the “white States.

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


How the amended ftc franchise rule knocks down barriers to franchising into the usa

With a US trademark registration registered trademark you may grant franchises without disclosure in the “white States.

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).


How the amended ftc franchise rule knocks down barriers to franchising into the usa

Washington registered trademark you may grant franchises without disclosure in the “white States.

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


How the amended ftc franchise rule knocks down barriers to franchising into the usa

State Franchise Registration registered trademark you may grant franchises without disclosure in the “white States.

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.


How the amended ftc franchise rule knocks down barriers to franchising into the usa

Litigation Fear registered trademark you may grant franchises without disclosure in the “white States.

  • 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.


The ftc welcomes you to the usa
The FTC Welcomes You to the USA registered trademark you may grant franchises without disclosure in the “white States.


How the amended ftc franchise rule knocks down barriers to franchising into the usa

Thank you registered trademark you may grant franchises without disclosure in the “white States.

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