For almost half a century, disclosure, and in some cases, registration, have been the primary method of preventing fraud in connection with the sale of franchises. And generally speaking, no one has seriously suggested that there are any other acceptable alternatives for reducing the likelihood of fraud in connection with the sale of franchises. The regulators of franchising will soon be conducting a review of the Federal Trade Commission’s (FTC) Franchise Disclosure Rule under a mandate from the federal government that regulatory authorities review their regulations periodically to determine whether these regulations are still needed, and whether any changes to these regulations should be made.

History of Disclosure Requirement

Disclosure was no stranger as a means to prevent fraud when, in 1978, the FTC adopted it as the preferred means of reducing fraudulent franchise sales. Starting in 1970, a dozen or so states had enacted statutes dictating how a franchisor must disclose the details of its franchises before they may be sold to the public. In addition, almost all of these states required that the offering must be reviewed by these states’ administrators, and if these officials found any deficiencies in the proposed offering, the franchisor had to modify its offering materials to correct these. Since their adoption, mostly during the 1970s, a few states have eliminated the registration requirement, but for the most part, these laws have not been materially amended since their enactment.

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