Franchising in the US is governed by the Federal Trade Commission (FTC). The FTC Rule is the Mandatory Minimum for all States in the United States, including its possessions and territories (Puerto Rico). States may impose more strict rules, but not less strict. The FTC Rule seeks to insure that prospective franchisees receive full, accurate, and up-to-date information.  All states require a franchisor to deliver a disclosure document ("Franchise Disclosure Document" or "FDD," to prospective franchisees (including prospective master sub-franchisees).  The FTC Rule  does not govern the ongoing franchisor–franchisee relationship.  Rather, it only imposes pre-sale disclosure requirements and does not require any registration or filing.

 

 Prospects are entitled to rely upon the information contained in the FDD.  This information cannot be disclaimed in the franchise agreement.  Franchisees must be given a minimum period of time to review the FDD, before signing a franchise agreement or paying any fees to the franchisor or companies affiliated with the franchisor.

 

A franchisor must be in compliance with any applicable state registration and disclosure requirements before that franchisor may offer franchises.

 

 14 states have laws regulating the offer and sale of, and requiring pre-offer filings or registration of, franchises, as well as imposing pre-offer and pre-sale disclosure requirements. They are: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. Oregon regulates offers and sales, but requires no filing.

 

In addition, 21 states, as well as the District of Columbia, Puerto Rico, and the US Virgin Islands, have statutes that regulate the terms of the franchisor–franchisee relationship. These states are: Alaska, Arkansas, California, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, Rhode Island, South Dakota, Virginia, Washington and Wisconsin.

 

The FTC Rule requires that disclosure be made to a prospective franchisee at least 14 calendar days before the franchisee signs any franchise or other binding agreement with, or makes any payment to, the franchisor or any of its affiliates in connection with the proposed franchise sale, or earlier than those 14 calendar days if the prospective franchisee has ‘reasonably requested’ such earlier disclosure. In addition, certain state laws require that disclosure be made earlier in the sales process than the FTC Rule does.

 

Under the FTC Rule, if a sub-franchisor sells a franchise, it is jointly responsible with the franchisor for compliance with all franchise disclosure laws. Additionally, registration states require separate registration by the franchisor of the offer of sub-franchise rights and separate registration by the sub-franchisor of its offering of subfranchises.