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The vicissitudes of the stock market, a less than robust economy, downsizing of corporate America, high unemployment and job uncertainty, although viewed as adverse commerce conditions, can work as a breeding ground for franchising. Many of these countercyclical conditions have been present during the past several years, serving as a catalyst for increased franchise offerings. During this growth period, franchise regulatory agencies have been busy incorporating significant technology and registration developments. This article will summarize some of the more important initiatives that franchise regulatory agencies have recently undertaken or intend to implement in the near future. Many significant regulatory changes are at the state level because franchise registration and review of franchise prospectuses-known as Uniform Franchise Offering Circulars (UFOC)-are performed by those states that have enacted franchise laws containing registration, disclosure and anti-fraud provisions. Although no federal agency registers or reviews UFOCs, the Federal Trade Commission’s (FTC) Franchise Rule (Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures, 16 C.F.R. 436) requires that certain material disclosures be made to prospective franchisees. Thus, if a franchisor offers and sells franchises, in addition to complying with the FTC Franchise Rule (applicable in every state), it will have to satisfy any state franchise laws requiring, among other things, registration and disclosure review. New FTC franchise rule Currently, the FTC is in the process of amending its Franchise Rule for the first time since its enactment in 1979, and the franchising industry is eagerly awaiting the release of a staff report. What is a staff report? The Federal Trade Commission Procedures and Rules of Practice, 16 C.F.R. � 1.13(f) (1975), states that: “The staff shall make recommendations to the Commission in a report on the rulemaking record. Such report shall contain its analysis of the record and its recommendations as to the form of the final Rule.” Steven Toporoff, an attorney in the FTC’s Division of Marketing Practices, informed this author in an e-mail that the commission’s operating manual provides additional guidance: “Among other things, the report should contain: (1) A summary and analysis of the entire rulemaking record; (2) recommendations for final Commission action, including the final proposed form of a rule; (3) an analysis of significant alternatives; (4) an analysis of the projected benefits and any adverse economic effects for each proposal and alternatives; and (5) a discussion of the effects the proposed rule would have on state and local laws.” Toporoff also wrote that he anticipates that the “Staff Report will contain a copy of the proposed revised Rule and a chart to help readers compare the proposed revised Rule and the 1999 draft published in the Notice of Proposed Rulemaking. Once the Staff Report is announced, according to the FTC Operating Manual, there will be a 75-day comment period relating to matters or issues already in the rulemaking record before the Federal Trade Commission itself must vote on whether to adopt the revised rule. Finally, I should note that the Commission will not actually publish the Staff Report in the Federal Register. Rather, the Commission will announce in the Federal Register the availability of the Staff Report. Copies of the Report will be made available through our public records room, and I anticipate that it will be posted on our Web site. The Commission will also publish a news release announcing the availability of the Report.” Some of the topics in the rule-making record that point to expected changes include deliberation of: adoption of the state format of disclosure called the “uniform franchise offering circular format,” augmentation of the required disclosures, the FTC Franchise Rule application to international franchise sales activity, guidelines for electronic disclosure, disclosure exemptions, timing requirements for disclosure and the final franchise agreement prior to signing and a liability standard for a rule violation. Coordinated registration Franchise registration states, with the exception of California, agreed to work together on approving a multistate franchise registration program that permits one state to accept registrations on behalf of other states in a program called “coordinated franchise review.” Although California has not participated in the coordinated franchise review process, assistant deputy commissioner of California’s Department of Corporations, Tim Le Bas, reported in his comments at the October 2003 American Bar Association forum on franchising, that California will be able to participate in coordinated franchise reviews effective on Jan. 1, 2004, pursuant to Assembly Bill 1031. The process, which a franchisor can elect if seeking registration concurrently in two or more states, was formulated by the North American Securities Administrators Association. NASAA, the organization of state securities and franchise agencies, initiated the program to streamline and expedite multistate registration and to facilitate uniformity in the registration and review process. Franchisors that elect a coordinated franchise review must complete form CR-FRAN and submit it to each of the states in which it is seeking registration. The applicant must also submit that form to the Maryland Securities Division, which is the administrative state for the program. Once the administrative state receives the application, it conveys a communication, usually via NASAA’s state franchise listserv, to inform the participating states of the coordinated franchise review and to initiate colloquy regarding the designation of a “lead state.” The lead state will issue the comment and acceptance letters on behalf of all the franchise states, and is the only state permitted to communicate with the franchisor applicant. All participating states must submit comments, if any, to the lead state within 20 business days after receipt of the notice. Comments are submitted based on the UFOC guidelines and any state-specific items required by a state’s own statute or regulations. The lead state will send an initial comment letter to the applicant within 30 business days of the last participating state’s receipt of the application. Once all of the disclosure issues in the comment letter have been resolved, the lead state will issue an acceptance letter on behalf of all participating states. Electronic disclosure On Sept. 14, 2003, at the NASAA annual conference in Chicago, NASAA unanimously adopted the NASAA Franchise Project Group’s Statement of Policy Regarding Electronic Delivery of Franchise Disclosure Documents. The policy provides franchisors with guidelines on how to disclose information electronically to prospective franchisees over the Internet or by other electronic means. It requires that the disclosure document: “(i) is delivered as a single, integrated, document or file; (ii) has no extraneous content beyond what is required or permitted by law and by the UFOC Guidelines, but which may include customary devices for manipulating electronic documents in machine readable form and tools or access to tools that may be necessary or convenient to enable the recipient to receive and view the disclosure document; (iii) has no links to or from external documents or content; [and] (iv) is delivered in a form that intrinsically enables the recipient to store, retrieve, and print the disclosure document.” The policy also requires the franchisor to be able to prove that it delivered the disclosure electronically, and that it retains records of electronic delivery. Earnings claims Under both federal and all state laws, earnings projections are voluntary. From 1996 to 2001, NASAA’s Franchise Project Group considered finalizing a proposal for a statement of policy to make earnings claims mandatory; there is no effort to go forward with that proposal. It also does not appear that the FTC’s new rule will mandate franchisors to provide earnings claims. Proponents argue that an earnings claim is a material disclosure. Opponents urge that franchisors cannot obtain information necessary or reliable to make earnings claims, and they will increase franchisors’ liability. Although the determination to make an earnings claim remains voluntary, two questions that prospective franchisees ask are how much the franchise will cost, and how much it will earn. As a result of the latter question, the market may increase the percentage of franchisors that make earnings claims. Although franchisors providing earnings claims data was reported to be as low as 15% nationally (“Return On Investment,” 9 Franchising Bus. & L. Alert 1; Oct. 13, 2002, at 3), 31% of the UFOCs that New York received in 2003 contained, based on a random review, some type of earnings claims, and, in Maryland for the year 2002, 36% contained earnings claims. Dale Cantone, Shelley Harris-Horn, Timothy L. Le Bas, Stephen W. Maxey and Joseph J. Punturo, “An Open Forum with the Regulators,” ABA Forum on Franchising, at 30 (2003). State examiners will reject a purported earnings claim containing blank line-items for revenue and expenses. Id. Two important initiatives occurred this year toward online franchise registration: California began posting securities and franchise filings online ( www.corp.ca.gov/caleasi/caleasi.htm) and New York began accepting a CD in lieu of one of its two requisite paper copies of a UFOC in connection with an initial franchise registration. The NASAA Franchise Project Group began examining methods for states to implement electronic registration, but such exploration is still in its infant stage. The FTC and states continue to update and post new information on their Web sites. For example, many states now have the latest registration instructions and forms, and booklets posted for prospective franchisees to consider. Internet offers Many states adopted NASAA’s 1998 statements of policy regarding offers of franchises on the Internet, or a variation of it, which exempts franchisors from state registration requirements when franchisors post information regarding their franchise opportunities on the Internet. The information includes a disclaimer on the franchisor’s Web site that the franchisor is not offering franchises to residents of any jurisdiction in which the franchisor is not registered to sell franchises, and that no franchise will be sold until the offering has been registered and declared effective. Similarly, many states have adopted NASAA’s 2001 Statement of Policy regarding franchise advertising on the Internet or a variation of it, which is a safe harbor applying to passive forms of Internet communications and advertisements that are not directed toward specific persons, and the franchisor provides the Uniform Resource Locator address, also known as the URL, identifying the location of the Internet advertisement. Joseph J. Punturo is an assistant attorney general, franchise section chief, at the New York State Department of Law’s Investment Protection Bureau. He is former chairman of the New York State Bar Association’s Franchise Distribution and Licensing Law Committee, and a member of NASAA’s Franchise Project Group. Sonia Gupta, an intern at the New York State Department of Law and second-year law student at Touro Law Center, assisted in preparing this article.

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