Today, the Federal Trade Commission (the “Commission”) announced an amendment to its “Disclosure Requirements and Prohibitions Concerning Franchising” (16 C.F.R. Part 436) (the “Franchise Rule”) revising the monetary limits for three of the listed exemptions. Under these exemptions, a company that would otherwise qualify as a “franchisor” as defined under the Franchise Rule is excused from the Rule’s disclosure requirement if its offer and sale of franchises falls within one of these exceptions. The exemptions that were amended are:
- Minimum Payment Exemption. This exemption will apply when the total of the required payments (or commitments to make a required payment) to the franchisor or affiliate from before to within six months after the franchisee commences operation of his or her business is less than $570. Effective July 1, 2020, the monetary limit under this exemption will increase to $615.
- Large Franchise Investment Exemption. This exemption permits a franchisor to avoid the disclosure requirement when the franchisee’s initial investment will be $1,143,100 or more, excluding the cost of unimproved land and any financing by the franchisor or its affiliate. Effective July 1, 2020, this exemption will increased to $1,233,000.
- Large Franchisee Exemption. This exemption is limited to circumstances in which the franchise offer or sale is made to a large entity (such as an airport, casino, hospital, or university) that has been in business for at least five years and has a net worth of at least $5,715,500. Effective July 1, 2020, this exemption will increased to $6,165,500.
Among the revisions that were made in the 2007 amendments to the Franchise Rule was the requirement for the Commission to raise the monetary thresholds for the above exemptions every four years to adjust for inflation. These inflationary adjustments are tied to the Consumer Price Index for all urban consumers published by the Department of Labor (“CPI”).
Franchisors that seek to rely upon any of these exemptions should take care to review all of the Commission’s guidance about them, including its Compliance Guide. In some instances, special acknowledgements from the franchisee is necessary to perfect the exemption.