Are You In Compliance With Franchise Advertising Filing Laws?

As I work through annual Franchise Disclosure Document updates and renewals of registration, I am reminded of one of the areas of the law that is often misunderstood by new and emerging franchisors: state advertising filing requirements.  Most, but not all, of the franchise registration states require a franchisor to file samples of materials advertising the sale of franchises with the state authority prior to use. 

Under these laws, any advertising or promotional materials relating to the sale of franchises must be filed in advance, but this requirement does not extend to advertising that focuses on the product or service being offered by the franchise system itself. In other words, a sandwich shop franchisor would not required to file advertisements for a campaign designed to sell deli sandwiches, but it would be obligated to file marketing created to sell franchises.  While most states that require the filing of advertising do not generally send acknowledgements or other notices of receipt, they do specifically regulate the number of days in advance the materials must be received by the department. 

States with registration and disclosure laws generally prohibit franchisors from offering or selling a franchise through the use of any communication which includes an untrue statement of a material fact, or which omits to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. See, e.g., Cal. Corp. Code § 31201; Ind. Code § 23-2-2.5-27; Md. Code Ann., Bus. Reg. §14-229.    These blanket prohibitions generally apply to advertising and all other forms of communication by which a franchisor offers or sells a franchise.  

Some states contain more specific laws regulating content of advertisements.  For example, under California law, materials promoting the sale of franchises must contain the name and address of the franchisor and cannot contain “any statement or inference that a purchase of a franchise is a safe investment or that failure, loss or default is impossible or unlikely, or that earnings or profits are assured.”  Cal. Code of Regs., §310.156.1.    Maryland has a similar limitation on the use of the term “safe investment.” New York requires all advertisements to contain a standard warning legend stating that a franchise offering can be made only by prospectus filed with the Department of Law.  The warning must state in plain, readable print: “This advertisement is not an offering. An offering can only be made by a prospectus filed first with the Department of Law of the State of New York. Such filing does not constitute approval by the Department of Law.”  N.Y. Reg. §200.9.  Maryland and Minnesota prohibit the use of any financial performance representations in sales materials – even if those representations are identical to statements made in the disclosure document. Maryland Regs., §02.02.08.09; Minnesota Regs. §2860.4100.  Washington permits financial performance representations only under certain limited circumstances. WAC §460-80-510. 

All registration states provide a limited exemption for advertising franchise sales on the Internet.   Under a typical exemption, a franchisor is not required to register in the state or file advertising when it consists entirely of Internet-based marketing material.  The exemption is only available if: (a) the Internet offer indicates directly or indirectly that the franchise is not being offered to the residents of the registration state; (b) the Internet offer is not directed to any person in registration state by or on behalf of the franchisor or anyone acting with the franchisor's knowledge; and (c) no franchise is sold in the state by or on behalf of the franchisor until the offering has been registered and declared effective and the registered disclosure document has been delivered to the purchaser prior to the sale and in compliance with the applicable state franchise law.

It is important that a franchisor understand the laws that govern franchise advertising in order to comply with them.  For your information, I have attached a chart summarizing state filing requirements. As always, please feel free to contact me with any questions about these laws.  Download Advertising Filing Chart

3 comments

  1. Very informative article. It is unfortunate how disjointed and complex the exercise of franchising is due to the non uniformity of the process at State levels. We see so many great franchise concepts that never see the light of day due to inability to overcome this hurdle. I guess in this case we are lucky there are legal experts 🙂

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  2. I agree that one of the biggest problems that we have in the current franchise regulatory scheme is the lack of uniformity in federal and state laws, which create something of a patchwork of inconsistency and challenge the franchise professional working in multiple jurisdictions. I know NASAA is working towards creating some uniformity, but I believe we are still many years away.

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