New York Adopts Limited Franchise Trade Show Exemption; Will Other Registration States Follow Suit?

The State of New York recently enacted a new, limited exemption to its Franchise Sales Act (N.Y. Gen. Bus. L. § 680 et. seq.) (the "Act"), which will allow franchisors that are not registered with the State to participate in a franchise trade show under certain circumstances.  The exemption, which was enacted in time for franchisors that plan to attend the June 2012 International Franchise Expo in New York City, would allow an eligible franchisor to exhibit and offer for sale, but not to sell, franchises at a franchise trade show.  Before a company can actually sell a franchise covered under the Act, the franchisor would still have to register with the state as provided under New York law.  

Ordinarily, an unregistered franchisor that exhibits at a trade show in a franchise registration state would potentially violate that state's registration law, because the simple act of exhibiting at the show is arguably the making of an unregistered "offer to sell" a franchise.  For this reason, franchise companies have argued that state franchise registration laws unnecessarily discourage (and perhaps prevent) companies from participating in franchise expos for the purpose of obtaining valuable information.  Essentially, franchisors (and companies that are interested in franchising) contend that participating in trade shows can provide a valuable opportunity for them to "test the waters" to determine the market demand for their concepts.  According to their argument, if they are allowed to participate in trade shows without having to first register in the host state, they would be able to gain valuable insight from comments and suggestions made by prospects, other franchisors, and even attending consultants. 

From the franchisee's perspective, greater trade show participation by franchisors will increase the availability of information about a variety of concepts and give them the opportunity to obtain information, one-on-one, from representatives of those concepts – an opportunity that is unique to the franchise expo format.  Further, franchisees contend that more educated franchise companies make better franchisors, and will result in higher-quality Franchise Disclosure Documents and a better overall franchise system. 

For these reasons, both franchisors and franchisees have urged certain registration states to consider adopting an exemption similar to the one recently created in New York.  For example, California (the host state for the annual West Coast Franchise Expo is currently considering (but has not yet passed) a similar regulation that would provide franchisors the opportunity to attend and exhibit at trade shows without first having to go through the full registration process. I will update this blog if and when California and any other state follows New York’s example.

To take advantage of New York’s exemption, a franchisor is required to complete and submit an exemption application form and supporting materials to the Office of the New York Attorney General.  Exemptions are not automatic; the Attorney General's office will review applications and reserves the right to deny any request.   

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