FR ANCHISE RULE 16 C. F.R. Part 436

1 FRANCHISE RULE. 16 Part 436. compliance GUIDE. May 2008. INTRODUCTION. This compliance Guide is intended to help franchisors comply with the Federal Trade Commission's amended Franchise Rule. The original Franchise Rule went into effect on October 21, 1979. The Federal Trade Commission ( FTC or the Commission ) approved amendments to the Franchise Rule on January 22, 2007. Since July 1, 2007, franchisors could comply with the FTC's disclosure requirements by using any one of the following formats: (1) the original Franchise Rule; (2) the Uniform Franchise Offering Circular ( UFOC ); or (3) the amended Franchise Rule. Once a franchisor selects a disclosure format, it must use that format and no other.

2 As of July 1, 2008, however, all franchisors must use only the amended Franchise Rule. This Guide does not modify the amended Rule. It explains the requirements of the amended Rule. Moreover, it does not exhaustively cover every requirement contained in the amended Rule, but focuses on amended Rule provisions that depart from the familiar UFOC. Guidelines. This Guide also includes sample disclosures that illustrate the new provisions and will be useful in preparing compliant disclosures. There is no substitute for the text of the amended Rule. It is the authoritative statement of what franchisors need to do to comply. Thus, the amended Rule's text along with its explanatory Statement of Basis and Purpose is the starting point and ultimate authority in preparing compliant disclosures.

3 This Guide is an additional resource, representing the FTC. staff's view of what the law requires. This Guide will be updated periodically as new interpretive issues arise. Other important resources for compliance guidance are the Amended Franchise Rule FAQ's on the FTC's web site at , and staff opinions that have been issued in response to specific requests regarding particular fact situations. The staff opinions can be found at The advice in this Guide is not binding on the Commission. In addition, the original Rule's Statement of Basis and Purpose and previous informal staff advisory opinions remain valid sources of interpretation, except to the extent of any conflict with the amended Rule's requirements.

4 Like the original Franchise Rule and the UFOC Guidelines, the amended Rule requires franchisors to give prospective franchisees material information, including background information on the franchisor, the costs of entering into the business, the legal obligations of the franchisor and the franchisee, statistics on franchised and company-owned outlets, and audited financial information. In addition, if franchisors elect to make any financial performance representations, the amended Franchise Rule requires certain disclosures and substantiation for those representations. For the most part, these disclosures are based upon the UFOC Guidelines, with which many franchisors and practitioners are already familiar.

5 As outlined below, the amended Rule differs from the UFOC Guidelines (and the original Rule) in several respects. First, the amended Rule updates the UFOC Guidelines to address new technologies, like the Internet. Second, the amended Rule requires more disclosure about the nature of franchisor-franchisee relationships. The amended Rule includes several disclosure requirements not included in the UFOC Guidelines. Also, the Amended Rule exempts certain entities that the original Rule did not exempt, and prohibits certain practices not addressed in the original Rule. -ii- TABLE OF CONTENTS. Franchise Rule Coverage.. 1. What Types of Relationships Are Covered.. 1. The Trademark Element.

6 2. The Significant Control or Assistance Element.. 2. When Is Control or Assistance Significant.. 2. What Activities Do Not Constitute Significant Control or Assistance.. 4. The Required Payment Element.. 4. What Types of Payments Constitute Required Payments .. 5. What Types of Payments Do Not Constitute Required Payments .. 6. What Types of Relationships Are Not .. 6. Business Opportunities.. 6. Sales of Franchises to Be Located Outside of the United States and its Territories.. 7. What Types of Relationships Are .. 7. Minimum Payment Exemption.. 7. Fractional Franchise Exemption.. 8. Whose Experience May Be .. 8. What Does Same Line of Business Mean.. 8. How Is Sales Volume.

7 8. Leased Department Exemption.. 9. Oral Agreements.. 9. Petroleum Marketers and Resellers Exemption.. 9. Large Franchise Investment .. 10. What Is an Initial Investment .. 10. Do Conversion Franchises and Transfers Qualify for the Exemption.. 11. Who Must Make the Initial Investment.. 12. What Is the Acknowledgment .. 12. Large Franchisee Exemption.. 12. What Type of Business Experience Is Required.. 13. How Is Net Worth Determined.. 13. May the Experience and Net Worth of Parent and Affiliate Companies Be Considered.. 13. The Insiders Exemption.. 13. Exclusions from the Amended Rule.. 15. Employer-employee Relationship .. 15. General Partner Relationship Exclusion.

8 15. Cooperative Associations Exclusion.. 16. Certification or Testing Services Exclusion.. 16. Single Trademark License Exclusion.. 16. -iii- compliance with Disclosure Obligations.. 17. Who Is Responsible for Preparing Disclosure Documents.. 17. Who Is Responsible for Furnishing Disclosure Documents.. 18. What Happens When an Existing Franchisee Sells His or Her Outlet.. 18. What Happens When an Existing Franchisee Purchases Additional Outlets.. 19. Ways of Furnishing Disclosure .. 19. Are There Any Specific Requirements for Electronic Disclosures.. 19. Is Electronic Disclosure Permitted for All Franchisors as of July 1, 2007.. 20. At What Point in the Sales Process Must a Franchisor Furnish the Disclosure Document.

9 20. Payment to or Binding Agreement with the Franchisor or Affiliate.. 21. Actions That Constitute the Furnishing of Disclosure Documents.. 21. Opportunity for Prospective Franchisees to Review the Franchise .. 22. Unilateral Material Modifications by the .. 22. Unilateral Material Modifications by the .. 23. The Disclosure Document.. 24. The Cover Page.. 24. Reference to Item 5 and Item 7 Fees and Investment.. 25. Available Disclosure Formats.. 25. Issuance Date.. 26. Inclusion of State Information on the Cover Page.. 26. Sample Cover Page.. 27. The Table of Contents.. 27. Sample Table of Contents.. 28. Item 1: The Franchisor and Any Parents, Predecessors, and Affiliates.

10 29. Franchisor .. 29. Agent for Service of Process Disclosure.. 29. Parent Disclosures.. 29. Predecessor .. 30. Principal Business Address Disclosure.. 30. Applicable Government Regulations .. 31. Sample Item 1.. 32. Item 2: Business Experience.. 33. Sample Item 2.. 34. Item 3: Litigation.. 34. What Types of Litigation Must Be Disclosed.. 34. Pending Actions.. 35. Material Actions Involving the Franchise .. 36. Prior Actions.. 37. Injunctive Actions.. 38. Whose Litigation Must Be Disclosed.. 39. Chart of Whose Actions Must Be Disclosed.. 40. Sample Item 3.. 41. -iv- Item 4: Bankruptcy.. 42. Sample Item 4.. 43. Item 5: Initial Fees.. 43. Uniformity of Fees Disclosure.