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The Franchise Registration Process: Some Steps to Follow

If you are a franchisor or an emerging franchisor you understand or should understand that when it comes to selling franchises you must distinguish between franchise registration states and non-registration states and that prior to offering or selling a franchise in a registration state your FDD must first be registered with the state. Once registered your FDD must be updated no less frequently than annually and your registration must be renewed.

Each registration state designates a particular entity to regulate and oversee the franchise registration process. For example, in the State of New York your FDD must be registered with the New York Attorney General, in the State of Maryland your FDD must be registered with the Maryland Attorney General and in the State of California your FDD must be registered with the California Department of Corporations. Although each franchise registration state has adopted its own regulations and institutes varying regulation and requirements, as to the application process itself, the registration states have adopted uniform and standardized franchise registration applications, forms and instructions published by the North American Securities Administrators Association (NASAA).

Below we discuss some of the steps and information that you need to be aware of to properly and effectively register your franchise disclosure document and insure that your franchise sales are legally compliant:

Timing

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 can take anywhere from 20 days to three months depending on the completeness of your FDD. To learn more about how often and when franchisors need to update and register their FDD, click here.

The Need for a Unified FDD: Understand State Variations

A critical aspect of maintaining a compliant FDD is creating a unified FDD. 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. The ultimate goal is to reconcile all of the state changes and end up with an FDD that identical among all of the registration states. For start-up franchisors this process may take some time but unification needs to be an absolute goal that you and your franchise team or franchise lawyers focus on.

Other variations exist on a state-by-state basis. For example most registration states follow the federal financial statement phase-in process allowing 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, unlike New York, 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.

Financial Statements

Many times the launch of a franchise system and the renewal of franchise registrations are delayed due to financial statements. That is, the accountants have not completed the audited financial statements required by Item 21 of the FDD. Part of the franchise launch, franchise registration and franchise renewal process must account for the timing needed by your accountant to prepare and complete audited financial statements for your franchise company. Your franchise lawyer should be speaking with your accountants as early as possible.

Uniform Franchise Registration Application

Although each franchise registration lists and identifies their 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, though your franchise registration application will include the following forms:

  • Uniform Franchise Registration Application page with data on the franchisor;
  • Certification page or "signature page";
  • Consent to Service of Process;
  • Sales Agent Disclosure Form and the new Franchise Seller Disclosure Form;
  • Supplemental Information Form;
  • Copies of all advertising or promotional literature proposed to be used in the state;
  • Two paper copies of the disclosure document;
  • An auditors' consent; and
  • Application fee.

Far too many emerging franchisors unintentionally create liability through a failed or lapsed registration. When these lapses occur your franchise sales process becomes jeopardized and potentially significant future legal liabilities are created. To learn more about our Franchise Counsel Program and how we actively manage our clients FDD's, maintain their registrations and create a unified FDD, click here.

Charles Internicola

by Charles Internicola
National Business and Franchise Lawyer

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