Amended FTC Franchise Rule 16 C.F.R. Part 436 5/9/08
The Federal Trade Commission (FTC) has approved amendments to the Franchise Rule, which was originally promulgated in 1978.
- News release;
- Federal Register text (pdf) of the rule
- FTC amended rule frequently asked questions (FAQ)
- FTC's Compliance Guide 5/9/08
- Links to other information about the amended Franchise Rule 5/9/08
See also, suggestions for preparing to implement the amended FTC rule.
The amended Rule has a phased-in effective date:
- as of July 1, 2007, franchisors MAY follow the amended Rule, or
- they may continue their current practice of complying with the original FTC Rule or individual state franchise disclosure laws that require an Uniform Franchise Offering Circular (“UFOC”)
- by July 1, 2008, they MUST follow the amended FTC Rule only.
Between July 1, 2007 and July 1, 2008, franchisors may NOT "pick and choose" and select portions of the new rule and portions of the old rule, but must comply in its entirety with either the original rule or the amended rule.
State coordination with the new rule
Under the original rule the FTC found that the UFOC format substantially complied and satisfied the need for disclosure to potential franchisees and could be used as a substitute for an FTC format disclosure document. The UFOC will no longer be allowed as a substitute format after July 1, 2008.
The ability of franchise regulating states to incorporate these new changes is complicated because while some states only require regulatory amendments to accomplish the changes, a number of states' franchise laws are set by statute which will require legislative action.
The North American Securities Administrators Association (NASAA) 7/26/07
NASAA adopted Interim Guidelines for the filing of a Uniform Franchise Offering Circular (UFOC) on June 22, 2007. The interim guidelines recommend that, as of July 1, 2007, registration states permit franchisors to file disclosure documents prepared in accordance with the new FTC franchise rule, adopted January 23, 2007.
NASAA issued the proposed 2008 Franchise Registration and Disclosure Guidelines February 26, 2008 (AMENDED AND RESTATED UFOC GUIDELINES) 7/22/08 download guidelines
Commissioner's Release 17-F, provides that beginning July 1, 2007, the Department of Corporations will accept the following under the FIL:
- From July 1, 2007 through June 30, 2008, either (1) the current UFOC Guidelines or (2) the Franchise Interim Statement of Policy (or the final Statement of Policy if enacted by NASAA).
- On and after July 1, 2008, franchisors are required to register franchises using only the new Uniform Franchise Disclosure Document (UFDD) in accordance with the Franchise Interim Statement of Policy (or the final Statement if enacted).
For applicants choosing to file disclosure documents using the new FTC Rule format rather than the UFOC Guidelines, here are some tips:
- All other California franchise application requirements (including those in Rule 310.114.1) will continue to apply.
- It is unacceptable to mix and match the formats.
- Use the new state cover page prescribed under the NASAA Statement of Policy.
- In a cover letter accompanying the application, indicate which disclosure format the applicant is submitting.
The amended FTC rule does not preempt state law
The revised FTC rule does not preempt state law, but merely sets a floor on the disclosure. States can continue to require additional disclosure and other matters extending beyond the FTC requirement, e.g., cover page risk factors. State laws generally do not have any provisions dealing with "pure electronic disclosure." The ability of franchise regulating states to incorporate these new changes is complicated because although some states only require regulatory amendments to accomplish the changes, a number of states' franchise laws are delineated by statute which will require legislative action.
The UFOC guidelines (explanatory commentary for preparing the UFOC) will cease to have effect except to the extent that the regulating states either now or in the future require franchisors to go beyond the revised rules disclosure mandates. For example, states may continue to mandate risk factors on the cover page and disclosure in the UFOC Item 2 of the identity of franchise broker.
Some commentators suggest not implementing the new FTC rule version of the disclosure document at the annual renewal date due to concern that the flood of new documents and substantial revisions to be reviewed will delay registration and require "going dark" or ceasing franchise sales until registration is completed. Instead they are suggesting filing the renewal in the ordinary course, and then "amending" that renewal filing, for example in May of 2008, with the notation it is a "non-material" amendment, so franchisors can continue using their current UFOC disclosure documents until the revised FTC rule document registration is granted and avoid any franchise sales down time.
New disclosure timing rules
The timing requirements for delivery of disclosure documents will be changed.
- the "first personal meeting" disclosure requirement
- the "ten business day" trigger for delivery of disclosure documents, and
- the "five business day" trigger for franchise agreements in execution ready form.
Calendar rather than business days for counting
The new requirement will be 14 calendar days (rather than business days) before the franchisee signs a binding agreement.
Old execution ready delivery requirement eliminated
The 5 day requirement for execution ready copies is eliminated, with the assumption being that most changes are requested by the franchisee for their benefit.
New execution ready delivery requirement added
However, if the franchisor unilaterally or materially alters the terms of any standard franchise agreement or other agreement, it must deliver the execution ready copy of the agreement to the prospective franchisee 7 calendar days prior to the execution.
New disclosure requirements
There are new disclosure obligations and triggers not found in the original rule or the UFOC format, e.g., franchisor must furnish a copy of the disclosure document on reasonable request if earlier than otherwise required, and, franchisors are required to provide updated disclosure documents to prospective franchisees in the sales "pipeline" if available and requested.
Renewal of existing franchisees
As previously, the following are not considered the sale of a franchise and disclosure is not required for existing franchisees renewing their franchise agreement if they are:
- merely entering into a new agreement without any required payment
- entering into a new franchise agreement for which does NOT contain materially different terms or conditions than the expiring agreement with or without payment of a fee, or
- extending the existing agreement with or without a fee
Disclosure to existing franchisees is required if the terms are materially different and there is a fee.
The new rule specifically permits electronic disclosure, such as through the internet or by a computer disc or CD-ROM. It prohibits franchisors from using any electronic enhancements, such as audio, video, or other multi-media pop-up screens and external links. Before furnishing a disclosure document the franchisor must advise potential franchisees of the formats in which the disclosure is made available, and any requirements to obtain it in a particular format.
State laws generally do not have any provisions dealing with "pure electronic disclosure."
The new disclosure requirements
The disclosure provisions under the new FTC rule are generally the same or similar to the current UFOC provisions, with the particular additions, and has been referred to as "UFOC plus." See The new disclosure requirements under the amended FTC franchise rule for some of the highlights.