The North American Securities Administrators Association (NASAA) recently proposed “Model Exemptions” relating to state franchise registration and disclosure laws. The NASAA is accepting comments for the Proposal through August 1, 2011 and the NASAA website provides instructions for submitting comments to the Franchise and Business Opportunity Project Group Chair and NASAA Legal Department.
If adopted, this gets us one step closer to simplifying the state disclosure and registration process for franchisors. Both the FTC and state laws contain certain exemptions from the franchise disclosure and registration requirements. A franchisor must first find an exemption under the FTC Rule. If an FTC exemption exists, the franchisor must still examine the law of the state of the franchisee to whom the franchisor wishes to offer a franchise. A franchisor may be exempt from disclosure under Federal law but state law may still require the registration or disclosure to its residents. Further complicating the process is that franchise exemptions are not uniform among the states. In addition, states which do have similar exemptions frequently define the exemptions, and the qualifications to claim these exemptions, differently.
The Proposal includes model language for states to use and adopts seven (7) exemptions, three (3) of which are forms of “sophisticated purchaser” exemptions:
- A Fractional Franchise Exemption;
- Experienced Franchisor Exemption;
- Existing Franchisee Exemption;
- Franchisor Insider Exemption;
- Sophisticated Franchisee (Accredited Investor) Exemption;
- Substantial Investment Exemption; and
- Discretionary Exemption.
The Proposal contains criteria to satisfy each of the exemptions and model procedures a franchisor must take to perfect an exemption. A franchisor would still complete a two step FTC and state level review of available exemptions. Adopted uniform state exemption criteria, however, may make the regulatory compliance undertakings of practitioners slightly less burdensome.