Common Franchisor Registration Mistakes
Virginia is one of the fourteen states that require franchisors to successfully complete a formal registration and review process before they are permitted to legally offer franchises for sale. While the process is reasonably straightforward with detailed guidance available on the applicable requirements, forms, etc., there are a variety of mistakes made that cause delay and additional expense. Here are a few common mistakes:
- Filing Too Late. As is the case in other registration states, a franchisor should not only file its registration application, but have had its application approved by the Virginia Division of Securities and Retail Franchising BEFORE engaging in any franchise marketing or sales activity in Virginia. Otherwise, expect to encounter a few hiccups during the registration process and be prepared to offer rescission to any Virginia franchisees who came on board prior to the registration being declared effective. In other words, advance planning is a must for franchisors who intend to tap into the lucrative Virginia market. For example, one of the biggest franchise expos in the industry takes place each Spring in Washington, D.C (IFE International Franchise Expo). Given the strong presence of Virginia residents at the show, any franchisor exhibiting at the trade show should strongly consider registering in Virginia well before the scheduled dates of the trade show.
- Not Following the NASAA Guidelines. When the FTC Rule was amended in 2007, the North America Securities Administrators Association followed suit by issuing a new set of guidelines offering very detailed guidance on the disclosure requirements under the Amended FTC Rule. State examiners expect applicants to strictly follow the Guidelines and, typically, many of their comments will relate to disclosure items in an applicant’s Franchise Disclosure Document (“FDD”) that deviate from the Guidelines in some respect. There is not much room for creative writing when it comes to FDD drafting.
- Not Including the Correct Financial information. While the Amended FTC Rule allows start-up franchisors to gradually phase-in the use of audited financial statements in the FDD, some registration states (e.g., Virginia) are more strict and require audited financials from the start. Do not forget to include an auditor’s consent letter too.
- Ignoring State-Specific Requirements. While the Amended FTC Rule and NASAA Guidelines provide franchisors with a relatively uniform disclosure format and registration procedure, every state’s franchise law has its own unique twists and turns, so one size definitely does not fit all when it comes to state registration requirements.
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