Changes To The FTC Franchise Rule
Following on my post from Dec. 23, 2005, the FTC recently amended the so-called Franchise Rule (16 CFR 436) which governs disclosure obligations in the sale of franchises. The new rule becomes fully effective July 1, 2008. From July 1, 2007 until July 1, 2008 you have the option of following either the old rule or the new. Take a look at the FTC's Press Release on the new rule. For the text of the new rule, click here (warning: large file). The new rule updates the old Code of Federal Regulations section (16 CFR 436) and adds a new section, 16 CFR 437.
posted by Trevor Rosen at 10:19 AM
7 Comments:
The citations to the rules are wrong. The Franchise Rule will be 16 CFR Part 436; the Business Opportunity Rule will be 16 CFR Part 437.
Thanks for this information! I've got a blog with business franchise information. You can find something useful for you:)
the FTC recently amended the so-called Franchise Rule (16 CFR 436) which governs disclosure obligations in the sale of franchises.
I see that buying a franchise would be much more difficult.
On the subject of business opportunity ventures, I would also like to mention the joint federal and state enforcement effort " Project Telesweep " that was successfully prosecuted this past summer. In response to the growing epidemic of business opportunity scams preying on would-be entrepreneurs, the Commission, along with the Justice Department and state enforcement officials, launched a coordinated and aggressive campaign to attack these scams, which promise quick and easy money in vending machines, amusement games, pay telephones, and display racks. Estimates of losses due to these scams are conservatively estimated at 100 million dollars per year. While these scams are not new, the introduction of high-pressure telemarketing tactics previously used to tout travel and sweepstakes rip-offs have allowed business opportunity scams to grow dramatically. Project Telesweep resulted in coordinated legal action against more than 100 of these fraud artists, and was unique in its pro-active enforcement approach. Unlike the more typical Commission action which usually follows from consumer complaints, Project Telesweep involved the use of undercover investigators who attended trade shows and combed the classified ads of nationally circulated newspapers to uncover fraudulent and non-complying business opportunity sales. The results of Project Telesweep are extremely gratifying, and I expect the Commission will continue to actively participate in these types of joint efforts in the future, including both enforcement actions and consumer education activities.
Turning back to the Franchise Rule, one issue that, not surprisingly, did not yield a consensus is the subject of mandatory earnings disclosures. Over the past few years, there has been considerable discussion about whether the Franchise Rule should compel franchisors to disclose earnings information. While the current Franchise Rule does not compel franchisors to disclose such information, it does require that franchisors who choose to make earnings claims must provide substantiation in the form of an earnings disclosure document. Indeed, many of the Commission's recent enforcement actions, including many that were part of Project Telesweep, challenged the practice of making earnings claims without providing the required substantiation.
All the new FTC Franchise Rule does is convert the old FTC format (its "Basic Disclosure Document" or BDD which was never adopted by any franchise registration state or used by franchise companies) to parallel the UFOC format, with very minor revisions and a name change. The new format is called Franchise Disclosure Document or FDD.
There are some good articles about this and other franchise topics on the Franchise Foundations website
For tips on evaluating franchise investments see the buying a franchise article
There is good info about the legal history of the FTC Franchise Rule, including how current disclosure requirements don't accomplish what they're supposed to at the Franchise Foundations website. Go to the Article Evaluating Franchise Investments - tips from a Franchise Attorney and Franchise Expert.
There's also a franchise legal help advice help hotline where you can contact a franchise attorney directly at the Franchise Attorney page.
There is also another good page on the Franchise Foundations website that talks about how easy it is (even under current franchise disclosure regulations using the FTC's FDD format) for anyone to compile an FDD Franchise Disclosure Document and start selling franchises. It's amazing the government, due to franchise industry lobbying, has regulation that is supposed to protect, but is quite deficient in this regard.
Go to the Buying A Franchise page.
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