FTC Disclosure Rules
The principle of disclosure lies at the heart of franchise regulations. FTC regulations provide minimum standards for pre-sale disclosures by franchisors to prospective franchise buyers. FTC rules are designed to ensure prospective purchasers of franchises are provided the material information they need to weigh the risks and benefits of such an investment.
In general, FTC rules require franchisors to, among other things, provide potential franchisees with a disclosure document—commonly known as a Franchise Disclosure Document (“FDD”) or Uniform Franchise Offering Circular (“UFOC”). Under FTC regulations, this document must contain specific items of information about the offered franchise, its officers, and other franchisees, among other things. See 16 C.F.R. §§ 436.3 - 436.5. The burden of compliance with the disclosure rule falls on the franchisor. And franchisors must timely provide prospective franchisees with disclosures in a format consistent with FTC regulations—that is, at least 14 days in advance before execution of a franchise agreement or the purchase of a franchise. See 16 C.F.R. § 436.2(a).
However, these strict disclosures rules do not necessarily apply to all business opportunities that may resemble or appear to be “franchises.” Sometimes, an arrangement will present itself wherein a seller promises to provide a buyer with location(s) to sell products or services to the public (e.g., vending machines, etc.) and promises to find the buyer a market for the products or services, in exchange for a required payment by the buyer, but no trademark or detailed business plan is offered or involved. The FTC promulgated separate (and more limited) regulations to apply to such “franchise business opportunities.” See 16 C.F.R. §§ 437.2 - 437.6. And these regulations are more limited because there is typically less structure required by the seller and less ongoing support and involvement of the seller in the buyer’s business.
In short, before executing any agreement or purchasing a business or business opportunity, it is important to seek out and retain knowledgeable legal counsel to review and understand whether a given business opportunity or situation will implicate requirements under federal or state laws and regulations.
If you are looking to discuss a franchise or business opportunity, contact the Law Offices of Kevin J. Dolley by phone at (314) 645-4100 or by email at firstname.lastname@example.org in order to set up a consultation.