Many time a franchise attorney may find itself representing a client who comes to you with a business idea. The idea, by definition, is a franchise. However, the client’s “franchise” may involve only one sale or meet the definition of a “fractional franchise” or include a business arrangement with a potential “franchisee” who most likely does not require the protection of state franchise laws. However, when you examine the applicable state franchise law(s), you discover that a specific exemption from registration and/or disclosure does not exist. When that client appears, it is important to not forget the “Exemption by Order” option offered by 10 states (California, Hawaii, Illinois, Indiana, Maryland, Minnesota, New York, North Dakota, Rhode Island and Wisconsin).
The “Exemption by Order” option allows a franchisor to gain an exemption from registration or disclosure or both where the registration or disclosure is not necessary or in the public interest for the protection of investors. It may be granted in situations where your client meets an FTC exemption (such as a fractional franchise exemption) not offered by the state.
I recently worked with a client wanting to sell one fractional franchise. The state did not offer an exemption which the client could utilize. A short telephone call to the state and a review of the requirements needed to apply for an Exemption by Order indicated that it was more likely than not that such an exemption would be granted. It took only a few hours of time to summarize the client’s business arrangement, explain why it otherwise would meet a FTC exemption, and complete the necessary filings. In less than a few weeks, we recieved an order granting exemption from registration and formal disclosure with the use of an FDD.
While this is not a guarantee for any client, it is an option that should be considered in those certain instances where it may apply. It certainly saves the client much time and money it would otherwise need to invest in preparing an FDD or registering with a state.