Securing franchise registration from the New York Attorney General pursuant to the New York Franchise Act (unless an exemption is available) is the keystone of a franchisor’s ability to legally engage in franchise sales activity in this state.
What does registration accomplish? In simple terms, it gives a business a license to sell franchises. A failure to register under the New York Franchise Act (again, unless an exemption therefrom is available) means that franchises cannot legally be offered or sold in this state. Recall that under the New York Franchise Act, illegal offers or sales of franchises—that is, those made in the absence of any registration where registration is required under the act—give rise to stiff civil and even criminal penalties on the part of both the franchisor itself and all persons and companies who control that franchisor and were involved in the violative conduct, including the franchising company’s officers and directors who knowingly and actively participated in the violation.
Process of Registration
The first stage of the registration process is to submit a registration application containing various forms to the New York Department of Law. Section 200.3 of the New York Franchise Regulations requires franchisors to file the following forms (prescribed by the Attorney General in his May, 2009 Franchise Registration Information Sheet) in connection with its application for franchise registration: an application “Facing Page”; a “Supplemental Information Page,” also referred to as a “Cost and Source of Funds” form; a Certification; a Sales Agent Disclosure Form (or a Franchise Seller Disclosure Form) for each franchise salesperson, and a Sales Agent Disclosure Form for each franchise broker, who will engage in the offer and sale of franchises in New York; two copies of the franchise disclosure document proposed for use in New York; a Consent to Service of Process designating the New York Secretary of State as the franchisor’s agent for service of process; two copies of any advertising proposed for use in New York; a form guarantee of performance if the franchisor intends to rely on a guarantee from a parent or any affiliate (most often utilized when franchisor itself may be deemed undercapitalized or, being a subsidiary of an entity whose financial statements are consolidated, has no audited financial statements of its own); and, a consent to the use of the franchisor’s audited financial statements manually signed by the independent certified public accountant who prepared those statements.
Applications for amendment of a franchise registration need only be accompanied by a facing page, certification and two copies of the franchise disclosure document, one a clean version and the other a blacklined version showing changes between the current franchise disclosure document and the franchise disclosure document previously on file with the Attorney General.
All registration and amendment applications must be submitted in hard copy and on a CD-ROM with a representation in the cover letter that the electronic files are identical to the hard copy submission.
The franchisor must also pay a filing fee, which is currently $750 for an initial application and $150 for an amendment application. In New York, annual renewals are referred to as “amendments” and they are subject to a $150 fee.
Pursuant to Section 200.3(h) of the New York Franchise Regulations, the Attorney General is required to, not later than 30 days after the submission of a franchise disclosure document or not later than 15 days after the submission of an amendment to the disclosure document, issue a letter stating that the disclosure document or amendment has been accepted for filing or, in the alternative, indicating in what respects the application for registration, the proposed offering disclosure document or the amendment is deficient or otherwise fails to make adequate disclosure.
In the event that the franchisor resubmits its application, disclosure document or amendment following the issuance of a deficiency letter, the Attorney General has 30 days following the resubmission to issue a letter accepting the disclosure document for filing or issue a further deficiency letter. This procedure is followed until the disclosure document or amendment has been registered or the franchisor has withdrawn or abandoned its application for registration or amendment.
The Attorney General may demand the submission of other pertinent documents and information in connection with his consideration of the application for franchise registration. Pursuant to Section 688 of the act, the Attorney General may also conduct investigations (sometimes at franchisor expense) if incomplete or questionable information is submitted. In addition, pursuant to Section 685 of the New York Franchise Act, the Attorney General may demand— as a condition precedent to registration—that a surety or performance bond or other security be posted, and that certain adverse information be “headlined” on the state cover page of the franchise disclosure document as a “risk factor.”
The franchise examiner reviews the franchise application for accuracy and completeness, attempting to make sure that the franchisor addressed each of the many required categories of disclosure and that all of the material facts of the franchise sale are accurately disclosed. The examiner will also make sure that the disclosure document is written in plain English.
The Attorney General can refuse to grant registration for any of a wide variety of grounds. For example, the Attorney General can reject an application for registration if there has been a failure to comply with any of the provisions of the act; if the application for registration is incomplete; if the franchisor’s financial condition is deemed insufficient for the franchisor to fulfill its obligations to franchisees; or, if the franchise disclosure document sought to be registered contains false or misleading information (or omits material information).
David J. Kaufmann is senior partner of Kaufmann Gildin Robbins & Oppenheim and wrote the New York Franchise Act while serving as special deputy attorney general of New York.