NASAA’s Franchise and Business Opportunity Project Group (the “Franchise Project Group” or “Project Group”) is rereleasing for comment from interested persons proposed changes to NASAA’s Model Franchise Exemptions (the “Model Exemptions”).  In response to a previous solicitation for comment, NASAA received a total of six (6) public comments regarding various provisions in the Model Exemptions.  Several commenters suggested that NASAA adopt more exemptions from registration and disclosure, or follow more closely exemptions under the Federal Trade Commission Franchise Rule.  Other commenters made additional suggestions to specific provisions of individual proposed model exemptions, to either clarify language or expand the availability of exemptions.   

After considering the comments, the Franchise Project Group has concluded that, in general, the Model Exemptions strikes the right balance between the desirability to reduce compliance burdens on franchisors and the need for prospective franchisees to review a Franchise Disclosure Document in appropriate cases, in order for franchisees to make an informed investment decision. The Franchise Project Group has determined, however, in light of several comments, to propose revisions to specific Model Exemptions. Some of the proposed revisions are technical corrections or changes to form only.  Other revisions are more substantive.  Proposed revisions to the Model Exemptions open to further comments appear below.  Proposed additions to the Model Exemptions appear in underlined text.  Proposed deletions appear in strike out text.

The comment period will remain open for 30 days.  Accordingly, all comments should be submitted on or before May 16, 2012.  Comments should be submitted by email or in writing and addressed to:

Franchise and Business Opportunity Project Group

Dale Cantone, Chair
Office of the Attorney General
Division of Securities
200 St. Paul Place, 20th Floor
Baltimore, MD 21202-2020

NASAA Legal Department

Joseph Opron, Counsel
750 First Street, NE, Suite 1140
Washington, DC  20002

Download: Revised Proposed Model Franchise Exemptions

Comments Received


Background of Proposed Revisions to Model Franchise Exemptions

A.    Fractional Franchise Exemption.

In light of several comments, the Franchise Project Group determined that the language of the model Fractional Franchise Exemption should be revised to clarify that the exemption anticipates an annual filing, as opposed to a separate filing for each proposed exempt transaction. Therefore, the Project Group has revised the language of this exemption to state specifically that the exemption requires an annual notice filing that, once made, expires after a period of one year from the date of the notice of exemption, and that the exemption may be claimed for additional one year periods. 

In light of comments from Starbucks Corporation, the Project Group concluded that it is impractical under the model Fractional Franchise Exemption to require state administrators to determine from a notice filing whether a “reasonable basis” exists for the parties to anticipate sales volume sufficient to qualify for the exemption. Therefore, the Franchise Project Group has revised the exemption to clarify that the administrator does not evaluate, in advance, anticipated sales volume of a proposed transaction, but that, in order to qualify for the exemption, both parties to the transaction must be capable of demonstrating that the franchisee can derive 80% of its total dollar volume in sales during the first year of operation independent of the franchise relationship.

B.     Experienced Franchisor Exemption.

Starbucks Corporation commented on a requirement under the model Experienced Franchisor Exemption for franchisors to file financial statements to demonstrate net equity in every instance. Starbucks notes that when a franchisor is a subsidiary of a “corporate family” the franchisor may not have separate financial statements of its own because the parent prepares consolidated financial statements. The Project Group agrees that the exemption should clarify how a subsidiary franchisor can establish net equity when separate financial statements do not exist for this reason. As a result, the Franchise Project Group has revised the exemption to allow a franchisor to submit a statement by an officer confirming a franchisor’s net equity if the franchisor does not prepare its own audited financial statements because its parent prepares consolidated statements. 

Several state examiners expressed concern that the language of the model Experienced Franchisor Exemption may not describe accurately the financial condition a franchisor must demonstrate in order to qualify for the exemption. The Project Group intended that if a franchisor’s audited financial statements contained a going concern note, the franchisor should not qualify for this exemption.  Therefore, the Project Group has added a subsection to the exemption that audited financial statements required under the model Experienced Franchisor Exemption cannot contain a going concern explanatory paragraph.  

C.    Sophisticated Franchisee (Accredited Investor) Exemption.

Several commenters suggested that NASAA revise the model Sophisticated Franchisee Exemption to delete a requirement that prospective sophisticated franchisees be represented by legal counsel.  Commenters suggest, among other things, that franchisees can determine for themselves the need to consult legal counsel. In response, the Project Group has revised the exemption to include an optional provision, to allow each state adopting the exemption to decide whether or not to require sophisticated franchisees to have legal counsel as a condition of granting the exemption.  The Project Group determined that if different states made different policy determinations on this isolated requirement, that distinction would not be a significant detraction from the goals of uniformity.  

In addition, several commenters stated that it is unduly burdensome to require that sophisticated franchisees have financial statements prepared under U.S. GAAP, and that franchisors should be able to rely on facially valid financial statements of a sophisticated franchisee without having to assume the risk that the statements do not comply with U.S. GAAP.  The Project Group agrees, and we have deleted the requirement from this model exemption.

D.    Discretionary Exemption.

Charles Modell suggests that the requirement for claiming a discretionary exemption under the model may prove problematic for applicants and administrators.  He notes that the model Discretionary Exemption requires the submission of a proposed order of exemption, and he suggests that most applicants are not able to prepare proposed orders in the form acceptable to the administrator.  The Project Group agrees with this observation, and we have deleted the requirement in the exemption for applicants to submit a proposed order.