Twelve states have franchise registration and disclosure laws (CA, HI, IL, IN, MD, NY, ND, RI, SD, VA, WA, WI) and the others do not. So why are Business Opportunity laws important for franchisors to keep in mind? Because they are a proverbial "trap for the unwary."
Business Opportunity Laws frequently require compliance by franchisors that resembles what franchise laws require. Almost as often, a few inexpensive steps can be taken to avoid that costly compliance, by meeting requirements for an exemption, or small modifications to the franchise program. If these steps are not taken, a franchisor could unknowingly violate a business opportunity law, creating potential claims or liabilities to franchisees and potential enforcement action by states.
Laws exist in 25 states regulating so-called "Business Opportunities" (or Seller Assisted Marketing Plans as they are called in California and Nebraska).
Like franchise laws, Business Opportunity statutes require pre-sale registration with the state, presentation of a disclosure document, and a cooling off period, before any agreement may be made or any money received. Unlike franchise laws, they also require posting a security bond with the state.
Oversimplifying, these laws apply when a franchisor or other seller (1) provides products, equipment, supplies or services; (2) helps the franchisee or purchaser start or operate a business; (3) the purchaser pays an initial fee; and (4) the franchisor or seller provides any of the following kinds of assistance: (A) a sales or marketing program; (B) a guarantee that the purchaser's revenue or income will exceed the price paid; (C) locations for vending machines, amusement machines, racks, displays or the like; (D) a promise to buy products made by the investor using the purchased equipment or supplies.
Many state business opportunity statutes have exceptions or exemptions that let franchisors avoid their requirements of an additional layer of costly legal compliance. In some states, a franchisor with a federally registered trademark that complies with the Federal Trade Commission franchise rule, is exempt. In six states (Florida, Michigan, Texas, Utah, Nebraska, Kentucky) a short notice must be filed with the state to meet its exemption requirements. In other states, a franchisor can avoid the law's coverage by making sure its program structure takes it outside the definition of a business opportunity. For most franchisors, this is not as difficult as it may seem at first.
Over the years we have assisted franchisors, licensors and others in economical steps to avoid costly state business opportunity law compliance.
In a recent assignment, we assisted a client who has licensees nationwide supply a line of products to one of the country's largest retail chains. We recommended small edits to its licensing and distribution agreement and one page filings in states mentioned above, to document compliance with exemptions or non-coverage of state business opportunity laws.
