The “Insiders” Exemption | Exemption From Franchise Rule

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The “Insiders” Exemption

The amended Rule adds a new exemption for franchise sales to the officers, directors, general partners, managers (collectively “officers”), and owners of a franchisor. The prerequisites to qualify for this exemption differ depending upon whether the individual franchise purchaser is an officer, director, general partner, or manager, on the one hand, or an owner, on the other.

To take advantage of the exemption, an officer must seek to purchase at least a 50% ownership interest in the franchise being offered for sale. In addition, the officer must have at least two years of experience with the franchisor as an officer, director, general partner, or manager. Further, the prior experience must be recent: the officer must currently be associated with the franchisor or have been associated with the franchisor within 60 days of the proposed franchise sale. For example:

  • An officer new to the company with only 14 months of experience would not qualify for the exemption. The officer must have two years of experience with the company to qualify.
  • An officer with five years of experience with the company who leaves the company on January 1, 2007, would not qualify for the exemption if she were to seek to purchase a franchise on July 1, 2007. The officer’s prior experience must be within 60 days of the franchise sale.

To take advantage of the exemption, an owner must also seek to purchase at least a 50% ownership interest in the franchise being offered for sale. In addition, the owner must have had at least a 25% interest in the franchisor for at least two years, and that ownership interest must be recent – at least 60 days before the sale of the franchise. For example:

  • An owner of only a 10% interest in a company would not qualify for the insiders exemption if she were seeking to purchase a franchise. She must own at least 25% of the company to qualify.
  • An owner of a 50% interest in the company would not qualify for the exemption if he owned his interest for only eight months. To qualify, an owner, even if a sole stockholder, must own his interest for at least two years.
  • A sole stockholder of the company would not qualify for the exemption if she sells her shares in the company and then seeks to purchase a franchise eight months after the sale. The ownership interest must be recent – within 60 days of the sale.
CREDIT: The content of this post has been taken from the Federal Trade Commission’s document, Franchise Rule Compliance Guide.