Franchises – What Types of Relationships Are Not Covered or Exempt?

What Types of Relationships Are Not Covered?

As discussed in the Statement of Basis and Purpose, the amended Rule no longer covers the sale of business opportunity ventures. It also does not cover the sale of franchises to be located outside of the United States and its territories.

Business Opportunities

Disclosure requirements and prohibitions pertaining to business opportunities are now set forth in a separate Rule – 16 C.F.R. Part 437. At present, Part 437 is substantively identical to the disclosure requirements and prohibitions set forth in the original Franchise Rule. The Commission, however, is contemplating amending Part 437, and there is an ongoing rulemaking on that issue.

Limitation of the geographic scope of 3 the amended Franchise Rule is not intended to limit the FTC’s jurisdiction, as it is set forth in section 5(a) of the FTC Act, 15 U.S.C. 45(a), and section 3 of the U.S. SAFE WEB Act of 2006, Pub. L. No. 109–455, 120 Stat. 3372. 4 The Commission may adjust the $500 threshold – and all other monetary thresholds found in the Rule’s exemptions – every four years for inflation.

Sales of Franchises to Be Located Outside of the United States and its Territories As a matter of policy, the amended Rule reaches only the offer or sale of franchises to be located in the United States and its territories. Accordingly, the amended Rule does not apply, for example, to the sale of a franchise to an American citizen living in Paris (or in Chicago), or to a French citizen in Paris, when the outlet will be located in Europe.

What Types of Relationships Are Exempt?

Some business arrangements satisfying the three definitional elements of the term “franchise” nonetheless may be exempt from the amended Franchise Rule. First, the amended Rule retains each of the exemptions found in the original Rule: the minimum required payment, fractional franchise, leased departments, and oral agreements exemptions. Second, the amended Rule adds new exemptions for sales governed by the Petroleum Marketing Practices Act, and for certain sales involving sophisticated investors.

In following posts, these topics will be discussed:

  • Minimum Payment Exemption
  • Fractional Franchise Exemption
  • Leased Department Exemption
  • Oral Agreements
  • Petroleum Marketers and Resellers Exemption
  • Large Franchise Investment Exemption
  • Large Franchisee Exemption
  • The “Insiders” Exemption
  • Exclusions from the Amended Rule

This post is part of a series of posts discussing the legal aspects of franchising.

CREDITS: This is an excerpt from A Guide to Starting a Business in Minnesota, provided by the Minnesota Department of Employment and Economic Development, Small Business Assistance Office, Twenty-eighth Edition, January 2010, written by Charles A. Schaffer, Madeline Harris, and Mark Simmer. Copies are available without charge from the Minnesota Department of Employment and Economic Development, Small Business Assistance Office.