Offering and selling franchises is governed by the Federal Trade Commission’s trade regulation rule entitled “Disclosure Requirements and Prohibitions Concerning Franchising; Final Rule,” 16 C.F.R. Part 436 (the “Amended FTC Rule”).  Among other things, it requires franchisors to provide prospective franchisees with a pre-sale franchise disclosure document with 23 “Items” of information (“FDD”) and imposes a 14-day waiting period before binding documents can be signed or money exchanged.  The Amended FTC Rule also prohibits franchisors from sharing any revenue or profit information (whether historical or projected) with prospective franchisees except for information contained in Item 19 of the FDD.   The FDD must be updated annually, within 120 days after the close of the franchisor’s fiscal year end, with current information as of its fiscal year end, including the franchisor’s audited, year-end financial statements.

In addition to federal law, offering and selling franchises is regulated by the franchise sales laws of 15 states: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington and Wisconsin (the so-called “Registration States”). These laws potentially apply to a franchise sale if the offer is made in the state, the offer is accepted in the state, the franchisee is domiciled in the state, and/or the franchised business will operate in the state.  Like the Amended FTC Rule, most states’ franchise sales laws require that the FDD be updated, and the state registration amended, after a material change occurs in the information contained in the registration.  Several states also regulate the offer and sale of franchise through their business opportunity laws: Alabama, Alaska, California, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Nebraska, New Hampshire, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Utah, Virginia, and Washington (the so-called “Business Opportunity States”). Several states’ business opportunity laws exclude or exempt the sale of franchises made in compliance with federal law. Certain states’ business opportunity laws, however, exempt sales only if the franchisor has a state or federal trademark registration, Other states’ business opportunity laws require either a one-time filing or annual filings to claim exemption from the business opportunity laws.

Once a franchise is sold, a different set of laws and regulations apply. These laws are commonly known as “franchise relationship laws” because they govern important aspects of the franchise relationship, such as the franchisee’s right to sell or transfer the franchise to a third party, and the franchisor’s right to terminate or refuse to renew the franchise relationship. While the franchise agreement may allow a franchisor or refuse to renew a franchise or provide a franchisor with certain remedies in the event of a franchisee’s default, franchise relationship laws may restrict a franchisor’s right to exercise certain contractual remedies, may extend applicable notice or cure periods, or may require the franchisor to compensate a franchisee if certain remedies are exercised.

California, New York and Washington impose additional registration requirements for franchise brokers or sales agents.