Source: http://www.scribd.com/doc/2781304/Rule-Trade-regulation-rules-Franchising-and-business-opportunities-disclosure-requirements-and-prohibitions
Timestamp: 2015-10-04 04:10:06
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Matched Legal Cases: ['art 436', 'art 436', 'art 437', 'art 436', 'art 436', 'art\n436', 'art 436', 'art 436', 'art 436', 'art 436', 'art 436', 'art 436', 'art 436', 'art 436', 'art 436', 'art 437', 'art 437', 'art 437', 'art\n436', 'art 437', 'art 453', 'art 455']

P. 1Rule: Trade regulation rules: Franchising and business opportunities; disclosure requirements and prohibitionsRule: Trade regulation rules: Franchising and business opportunities; disclosure requirements and prohibitionsRatings: (0)|Views: 138|Likes: 2Published by Justia.comRule: Trade regulation rules:Franchising and business opportunities; disclosure requirements and prohibitions, 15444-15575 [E7-5829] Federal Trade CommissionRule: Trade regulation rules:Franchising and business opportunities; disclosure requirements and prohibitions, 15444-15575 [E7-5829] Federal Trade CommissionMore info:Published by: Justia.com on May 01, 2008Copyright:Public DomainAvailability:Read on Scribd mobile: iPhone, iPad and Android.download as PDF, TXT or read online from ScribdFlag for inappropriate content|Add to collectionSee moreSee lesshttps://www.scribd.com/doc/2781304/Rule-Trade-regulation-rules-Franchising-and-business-opportunities-disclosure-requirements-and-prohibitions10/14/2013pdftextoriginal Friday,
Concerning Franchising and Business
Opportunities; Final Rule
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hRULES4
Federal Register/ Vol. 72, No. 61 / Friday, March 30, 2007 / Rules and Regulations
1See 16 CFR Part 436. Provisions of the original
Rule are cited in this document as 16 CFR 436.[ ].
Citations to the final amended Rule are cited simply
as 436.[ ] or 437.[ ], respectively. The text of the
final amended Rule is set forth in Section VII.
2The specific definition of the term \u2018\u2018franchise\u2019\u2019
is discussed below in connection with section
436.1(h).
3We were assisted in the effort to reduce
inconsistencies between the original Rule and
UFOC Guidelines by NASAA\u2019s submission of a
document entitled \u2018\u2018Comparison of UFOC and
Proposed FTC Disclosure Requirements\u2019\u2019 (\u2018\u2018NASAA
Comparison\u2019\u2019) (Jan. 8, 2002). A copy of this
document is on the public record in this
4The definition of \u2018\u2018business opportunity\u2019\u2019 is
discussed below in connection with section
437.2(a).
571 FR 19054 (Apr. 12, 2006).
Prohibitions Concerning Franchising
Prohibitions Concerning Business
Commission (the \u2018\u2018Commission\u2019\u2019 or
\u2018\u2018FTC\u2019\u2019) amends its Trade Regulation
Rule entitled \u2018\u2018Disclosure Requirements
and Prohibitions Concerning
Franchising and Business Opportunity
Ventures\u2019\u2019 (\u2018\u2018Franchise Rule\u2019\u2019 or \u2018\u2018Rule\u2019\u2019)
to streamline the Rule, minimize
compliance costs, and to respond to
changes in new technologies and market
conditions in the offer and sale of
franchises. Part 436 sets forth those
amendments to the Franchise Rule
pertaining to the offer and sale of
franchises. Part 437 sets forth a revised
form of the original Franchise Rule
pertaining solely to the offer and sale of
business opportunities. This document
provides background on the Franchise
Rule and this proceeding; discusses the
public comments the Commission
received; and describes the amendments
the Commission is making based on the
record. This document also contains the
text of the final amended Rule and the
Rule\u2019s Statement of Basis and Purpose
(\u2018\u2018SBP\u2019\u2019), including a Regulatory
EFFECTIVE DATES:The effective date of
the final amended Rule is July 1, 2007.
Permission to use the original Franchise
Rule, however, will continue until July
1, 2008. After that date, franchisors and
business opportunity sellers must
comply with the final amended Rule
final amended Rule and the SBP should
be sent to: Public Reference Branch,
Washington, D.C. 20580. The complete
record of this proceeding is also
available at that address. Relevant
portions of the proceeding, including
the final amended Rule and SBP, are
Steven Toporoff, (202) 326\u20133135,
Division of Marketing Practices, Room
286, Bureau of Consumer Protection,
Federal Trade Commission, 600
SUPPLEMENTARY INFORMATION:The final
amended Rule retains most of the
original Rule\u2019s pre-sale disclosures.1
Part 436 pertains to franchising\u2014
business arrangements that offer
purchasers the right to operate under a
trademark or other commercial symbol
and that typically offer a specific format
or method of doing business, such as
chain restaurants and hotels.2 Part 436
modifies the original Rule, however, by
reducing inconsistencies with state
franchise disclosure laws, by adopting,
in large measure, the disclosure
requirements and format of the Uniform
Franchise Offering Circular (\u2018\u2018UFOC\u2019\u2019)
Guidelines used by the 15 states with
pre-sale franchise disclosure laws.3 Part
436 of the final amended Rule, however,
is not identical to the UFOC Guidelines.
In several instances, part 436 is
narrower. For example, part 436 does
not incorporate the UFOC Guidelines\u2019
mandatory cover page risk factors,
disclosures pertaining to brokers, or
detailed disclosures pertaining to
franchisees\u2019 computer equipment
requirements. Part 436 also permits a
Further, part 436 of the final amended
Rule corrects a problem with the UFOC
Guidelines identified in the rulemaking
record. Specifically, the record
establishes that the current Item 20 of
the UFOC Guidelines\u2014a provision
requiring the disclosure of franchisee
statistics\u2014results in inflated turnover
rates. Part 436 of the final amended Rule
corrects this problem, based upon
suggestions contained in the record.
In a few instances, part 436 of the
final amended Rule is broader than the
UFOC Guidelines, addressing franchise
relationship issues that the rulemaking
record establishes are a prevalent source
of franchisee complaints. To that end,
part 436 of the final amended Rule
prospective franchisees with which to
assess the quality of the franchise
relationship before they buy, including:
(1) franchisor-initiated litigation against
franchisees pertaining to the franchise
relationship; (2) protected territories; (3)
the use of confidentiality clauses; and
(4) trademark-specific franchisee
Finally, part 436 of the final amended
Rule updates the original Rule and
UFOC Guidelines by addressing new
marketing techniques and new
technologies. For example, part 436
permits franchisors to comply with pre-
sale disclosure obligations
electronically. It also updates territorial
protection disclosures to address sales
via the Internet, catalogs, and
Part 437 of the final amended Rule
pertains to business opportunity
ventures. Business opportunities, such
as vending machine routes and rack
display ventures, typically do not
involve the right to use a trademark or
other commercial symbol and the seller
must provide purchasers with locations
for machines or equipment or with
clients.4Based upon the rulemaking
record, the Commission has proposed
that business opportunities covered by
the original Rule should be addressed in
a separate, narrowly-tailored trade
regulation rule. On April 12, 2006, the
Commission published a Notice of
Proposed Rulemaking (\u2018\u2018Business
Opportunity NPR\u2019\u2019) for a separate
Business Opportunity Rule.5Pending
completion of the proceeding initiated
with that notice, business opportunities
presently covered by the requirements
of the original Rule will remain covered,
as set forth as part 437 of the final
differs from the original Rule in three
respects only. First, references to
\u2018\u2018franchisor\u2019\u2019 and \u2018\u2018franchisee\u2019\u2019 in the
original Rule have been changed to
\u2018\u2018business opportunity seller\u2019\u2019 and
\u2018\u2018business opportunity purchaser,\u2019\u2019
respectively. Second, the original Rule\u2019s
definition of \u2018\u2018franchise\u2019\u2019 set out at
section 436.(2)(a) has been changed to
\u2018\u2018business opportunity\u2019\u2019 and the first
part of the original definition\u2014the
\u2018\u2018franchise\u2019\u2019 elements\u2014have been
deleted; the definition now focuses on
the second part of the original
definition\u2014the business opportunity
elements. Third, part 437 sets forth a
new exemption for franchises that
comply with, or are exempt from, part
436. Except for these three changes, all
disclosures and prohibitions in part 437
are identical to those of the original
Franchise Rule.
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643 FR 59614 (Dec. 21, 1978). Along with the
original Rule, the Commission published a
Statement of Basis and Purpose (\u2018\u2018original SBP\u2019\u2019), 43
FR 59621 (Dec. 21, 1978) and later Final
Interpretive Guides to the Rule (\u2018\u2018Interpretive
Guides\u2019\u2019), 44 FR 49966 (Aug. 24, 1979). Since
promulgation of the original Rule in 1978, the
Commission staff has also issued more than 100
advisory opinions to help assist the public in
interpreting various Rule provisions.
7Original SBP, 43 FR at 59625.
8Id., at 59627\u201339.
9The Commission used the same approach in
other trade regulation rules. See, e.g., Funeral Rule,
16 CFR Part 453; Used Car Rule, 16 CFR Part 455.
1060 FR 17656 (Apr. 7, 1995).
11Written Rule Review comments are cited as:
[Commenter] RR [comment number]. A list of all
commenters during the Rule Review and Rule
amendment proceeding, and the abbreviations used
to identify each, is set forth in Attachment A to this
document. Many of the comments in this
proceeding are available online at: www.ftc.gov.
12Rule Review transcripts are cited as
[Commenter] RR, [Sept.95] or [Mar.96] Tr.
13The UFOC Guidelines disclosure format is
similar in many respects to the original Rule\u2019s
disclosure requirements. To reduce compliance
costs and burdens, the Commission has permitted
franchisors to comply with the original Rule by
using the UFOC Guidelines format, provided that
they did so completely and accurately.See 60 FR
51895 (Oct. 4, 1995) (authorizing states to use
revised UFOC Guidelines). A copy of the UFOC
Guidelines can be found at the corporate finance
section of the North American Securities
Administrators Association website:
www.nasaa.org. It should be noted, however, that
the UFOC Guidelines address only required pre-sale
disclosures. Other provisions of state law applicable
to franchise sales\u2014such as the time for making
disclosures, disclosure document updating
provisions, and exemptions\u2014vary according to
each state\u2019s franchise statute or regulations.
1462 FR at 9115 (Feb. 28, 1997).
15Written ANPR comments are cited as:
[Commenter] ANPR [comment number].
16In general, the first day of each public
workshop discussed specific issues announced in
advance. Participants at these meetings were
selected based upon their comments or interest in
the subject matter. The second day of each
conference was an open forum in which the public
was invited to express their views on any franchise
or business opportunity issue. ANPR workshop
transcripts are cited as: [Commenter] ANPR [date]
STATEMENT OF BASIS AND
A. Overview of the Original Franchise
original Franchise Rule on December 21,
1978.6Based upon the original
rulemaking record, the Commission
found widespread deception in the sale
of franchises and business opportunities
through both material
misrepresentations and nondisclosures
of material facts.7Specifically, the
Commission found that franchisors and
business opportunity sellers often made
material misrepresentations about: the
nature of the seller and its business
operations, the costs to purchase a
franchise or business opportunity and
under which the business would
operate, the success of the seller and its
purchasers, and the seller\u2019s financial
viability. The Commission also found
other unfair or deceptive practices
pervasive: franchisors\u2019 and business
opportunity sellers\u2019 use of false or
unsubstantiated earnings claims to lure
prospective purchasers into buying a
franchise or business opportunity, and
franchisors\u2019 and business opportunity
sellers\u2019 failure to honor promised refund
requests. The Commission concluded
that all of these practices led to serious
economic harm to consumers.8
To prevent deceptive and unfair
practices in the sale of franchises and
business opportunities and to correct
consumers\u2019 misimpressions about
offerings, the Commission adopted the
original Franchise Rule, which is
primarily a pre-sale disclosure rule. The
original Rule did not purport to regulate
the substantive terms of the franchise or
business opportunity relationship.
Rather, it required franchisors and
business opportunity sellers to disclose
material information to prospective
purchasers on the theory that informed
investors can determine for themselves
whether a particular deal is in their best
interest.9
B. The Rule Amendment Proceeding
This Rule amendment proceeding
began with a regulatory review of the
Franchise Rule in 1995.10 To initiate the
Rule Review, the Commission published
a Federal Register notice seeking public
comment on whether there was a
continuing need for the Rule and, if so,
how to improve it in light of industry
changes since its promulgation in 1978.
In response to this notice, the
Commission received 75 written
comments.11
In addition, the Commission staff held
two public workshops, in which a total
of fifty individuals participated. The
workshops were transcribed.12The first
workshop\u2014held on September 11\u201313,
1995, in Bloomington, Minnesota\u2014
focused on the comments on the Rule,
in particular whether the Commission
should retain the Rule and, if so,
whether the Commission should reduce
inconsistencies between federal and
state pre-sale disclosure law by
incorporating in the Rule the UFOC
Guidelines adopted by each of the 15
states with franchise disclosure laws.13
Participants also discussed issues
arising from business opportunity sales.
The second workshop\u2014held on March
11, 1996, in Washington, D.C.\u2014focused
on the Franchise Rule\u2019s application to
sales of franchises to be located outside
As a result of the Rule Review, the
Commission determined that the
Franchise Rule continues to serve a
useful purpose and that it should be
retained. The Commission also
determined to modify the Rule in order
to reduce inconsistencies with the
UFOC Guidelines, while updating the
Rule to address new technologies
developed since the original Rule was
promulgated. Accordingly, in February
1997, the Commission published an
Rulemaking (\u2018\u2018ANPR\u2019\u2019).14The ANPR
solicited comment on several proposed
Rule modifications which would,
among other things, create a separate
trade regulation for business
opportunity sales, revise the Rule\u2019s
disclosure requirements to mirror those
of the UFOC Guidelines, limit the Rule\u2019s
application to sales of franchises located
in the United States, and permit
electronic disclosure. In response to the
ANPR, the Commission received 166
written comments.15The staff also held
six public workshops on the issues
raised in the comments, as set forth
July 28\u201329, 1997
August 21\u201322, 1997
UFOC, Internet, International, Co-branding, Alternatives to Traditional
September 18\u201319, 1997
October 20\u201321, 1997
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