Member Article

The Federal Trade Commission (the “FTC”) announced last week that it was amending its Franchise Trade Regulation Rule, entitled “Disclosure Requirements and Prohibitions Concerning Franchising” (the “FTC Franchise Rule”) to increase certain monetary thresholds necessary to meet three exemptions under the Rule. The FTC Franchise Rule, which mandates presale disclosure, applies to the offer or sale of franchises located in the U.S. Last week’s amendments, which change the monetary thresholds for inflation as required by the FTC Franchise Rule, will take effect on July 1, 2012.

Exemptions Overview

Among the available exemptions from the disclosure requirements of the FTC Franchise Rule are: (1) the minimum payment exemption,¹ (2) the large franchise investment exemption,² and (3) the large franchisee exemption.³

Minimum Payment Exemption

This exemption applies if the total amount of required payments, or commitments to make required payments, by the franchisee to the franchisor or any affiliate is less than $540 (previously $500) during the period prior to six months after the franchisee’s commencement of the franchised business.

Large Franchise Investment Exemption

This exemption applies to franchise offerings involving an initial investment of at least $1,084,900 (previously $1 million), excluding unimproved land and amounts financed by the franchisor. In order for the franchise offering to qualify for this exemption, the franchisee must sign an enumerated acknowledgement verifying that the initial investment exceeds $1,084,900 and that the transaction is therefore exempt from the FTC Franchise Rule’s disclosure requirements. This exemption applies if at least one individual prospective franchisee in an investor group meets the minimum investment requirement.

Large Franchisee Exemption

This exemption is applicable if the prospective franchisee “entity” (or its parents or affiliates) has been in business for at least five years and has a net worth of at least $5,424,500 (previously $5 million). This exemption expressly applies only to legal “entities.” However, the Statement of Basis and Purpose to the FTC Franchise Rule⁴ indicates that an individual may also be a qualifying “entity.”

Rule Amendments

When the FTC Franchise Rule was revised in 2007, the FTC provided in Section 436.8(b) of the Rule that the monetary thresholds in the exemptions will be adjusted for inflation every four years, based on the Consumer Price Index. The recent amendments reflect an increase in the Consumer Price Index for all urban consumers of 8.49 percent between the years of 2007 to 2011. These amendments and the adjusted thresholds automatically go into effect on July 1, 2012.

Conclusion

For additional information regarding the FTC Franchise Rule, please contact one of the attorneys listed below.