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As a franchisor, before offering or selling a franchise within a particular state, you must distinguish between franchise registration states, filing states, and non-registration states. Before selling a franchise within a franchise registration state, you must first register your FDD with the state’s designated regulatory agency. In filing states, you must first file a notice with the state regulator advising of your franchise offering and, depending on the state, requesting exemption from state business opportunity laws. In non-registration states, you are not required to register your FDD or make a filing with any state agency. No matter what state you are selling in, you must always ensure that your FDD is current and has been issued in accordance with the FTC Federal Franchise Rule.
The franchise registration states are California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, Virginia, Washington, and Wisconsin. Each registration state designates a particular entity to regulate and oversee the franchise registration process.
Although each franchise registration state has adopted its own regulations and requirements, the application process itself is uniform and standardized franchise registration applications, forms, and instructions are published by the North American Securities Administrators Association (NASAA).
If you are in the process of launching a your franchise system, then part of the launch process will be to file and register your FDD with the franchise registration states in which you intend to offer and sell a franchise. If your franchise company is physically located within a franchise registration state, then you must register your FDD within that state.
If you are an existing franchisor, then timing will depend on when you submit your application for registration. Timing varies from state to state and FDD registration can take anywhere from 20 days to three months depending on the completeness of your FDD and the time of year it is filed.
To learn more about how often and when franchisors need to update and register their FDDs, click here.
As you go through the state registration process, you will find that each state may have different comments and require different disclaimers. The result is that your FDD may vary from state to state. Your franchise compliance goal should be to reconcile all of the state changes and end up with a unified FDD that is the same among all of the registration states. For start-up franchisors, this process may take some time as you go through the initial registration process.
Other variations exist on a state-by-state basis. For example, most registration states follow the federal financial statement phase-in process, which allows year one start-up franchisors to launch with an unaudited opening balance sheet (while states like New York require the opening balance sheet to be audited).
Another example of variations between states relates to franchisor capital requirements. For example, states like California, Maryland, and Illinois will require franchisors to escrow their franchise fees or defer their collection of franchise fees if they believe that the franchisor’s balance sheet contains a low capital balance.
Although each franchise registration state lists and identifies its franchise registration requirements, forms, and filing fees; the forms and instructions upon which your registration application will be based are published by NASAA. There is variation among the states regarding certain disclosure requirements and supplements to the NASAA forms. Generally, your franchise registration application will include the following forms:
As a franchisor, you need to understand the franchise registration process. Failure to comply with and properly manage state franchise registrations will harm your franchise sales process and may create significant franchise liability exposure.
To learn more about our Franchise Counsel Program and how we actively manage our clients’ FDDs, maintain their state registrations, and create a unified FDD, click here.
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