1. How the Amended FTC Franchise Rule Knocks Down Barriers to Franchising Into the USA by: Carl E. Zwisler Haynes and Boone, LLP October 4, 2007

2. 2 State Franchise Registration US GAAP Audited Financial Statements 5 Business Day Closing Delay Litigation Fear UFOC First Personal Meeting

3. 3 UFOC a.Unimaginably Frustrating for Overseas Companies b.Unfortunately, Few Overcome Cost (of compliance) c.Unusually Fulfilling (for wallets) of Overseas Counsel d.Uniform Franchise Offering Circular

4. 4 UFOCUFOC Since 1979, no franchise may be sold unless prospective franchises received a Uniform Franchise Offering Councilor (UFOC) disclosure 22 items of disclosure List of all franchisees Copies of agreements UFOC Contains: Franchisor financial statements Earnings claims (if made)

5. 5 Global First Personal Meeting Etiquette

6. 6 US Franchise First Personal Meeting Etiquette UFOC Franchisor Franchisee

7. 7 First Personal Meeting UFOC Must be presented to a prospective franchise at First Personal meeting A meeting to discuss the sale or possible sale of a franchise. Without a UFOC to present, no sales discussions are permitted with prospective franchisee.

8. 8 State Franchise Registration In 13 states, no franchise may be offered until UFOC is approved by a state agency. One state requires filing, but no registration. One state requires disclosure, but not filing or registration

9. 9

10. 10 State Franchise Registration In 26 states, some franchisors must comply with state business opportunity sales laws.

11. 11 Franchise Registration/Disclosure and Business Opportunity States

12. 12 State Franchise Registration State Business Opportunity Filing Disclosure FDD (60-500 pages) State “Bus. Opp.” Disclosure Document (5-10 pages) Audit US GAAPNo Audit (usually) Filing Fees $250-$675 (initial)$25-$500 (initial) Review Time 2-3 Months 1-2 Weeks (little or no review)

13. 13 The Count “Counting can be lots of fun when you start with number 1”.

14. 14 US GAAP Audited Financial Statements UFOC must include 3 years financial statements audited under, US Generally Accepted Accounting Principles. Foreign audits are not acceptable

15. 15 Franchisees must review complete final versions of Franchise Agreements Related Agreements 5 Business Days before signing If negotiations occur at a closing which benefit franchisor, closing must be delayed 5 business days. 5 Business Day Closing Delay

16. 16 Fear of Litigation “Complaint” Your Franchise v. You Lawyer Franchiso r

17. 17 Litigation Fear US franchisees are reputed to sue franchisors whenever they are unhappy with their investments.

18. 18 The Problem All franchisors must provide All prospective franchisees A UFOC Containing US GAAP Audited Financial Statements At the First Personal Meeting Must first register the franchise in states with jurisdiction over the franchise offer Problem =+

19. 19 The Amended FTC Rule Eliminate s or Mitigates most Barriers.

20. 20 Mitigates Issue Eliminates Issue State Franchise Registration US GAAP Audited Financial Statements 5 Business Day Closing Delay Litigation Fear UFOC First Personal Meeting

21. 21 First Personal Meeting 5 Business Day Closing Delay New Rule: Deliver FDD at least 14 days before signing Franchise Agreement or accepting payment. New Rule: No additional cooling off period, Unless franchisor UNILATERALLY changes terms of agreement from what was disclosed.

22. 22 Now “UFOC” is “FDD” (Franchise Disclosure Document) UFOC 1974 - 2008 RIP

23. 23 UFOC Franchisor Franchisee No more First Personal Meeting Requirement

24. 24 Required disclosures may be delivered electronically. US GAAP requirement waved if US SEC approves use of Franchisor’s country’s GAAP for US securities reporting Affiliate may be established to franchise in US and, absent parent’s formal agreement to provide services to franchisees or to guaranty franchisor’s financial performances, only franchisor affiliate statements require US GAAP audit.

25. 25 UK Franchisor US Franchisee US Franchisor Subsidiary US Franchisee UK ParentUS GAAP Audit or US GAAP Audit

26. 26 If Franchisor has not offered franchises in US, no audit required for first year of franchise offers* --Phase in over 3 years * Not applicable in franchise registration states.

27. 27 In states where registration or disclosure is not required, 3 new exemptions ABOLISH DISCLOSURE REQUIREMENTS!!

28. 28 Exemptions $ 1 Million initial investment $1 Million includes investment in multiple franchises under: Area Development and Master Franchise Agreements. $1 Million does not include: 1.Amounts financed by the franchisor and its affiliates. 2.Investments in unimproved real property (“raw land”)

29. 29 Exemptions Continued $5 Million net worth and 5 years business experience of franchisee, its parent or affiliates.

30. 30 Exemptions Franchise Officers, Managers and Owners a.If Franchisor or one or more of its officers, directors, general partners, owners, or managers… b.Owns at least 50% of prospective franchisee, the sale is exempt. officers, or managers, etc. must have been associated with the franchisor for at least 2 years. have continued the association with the franchisor until 60 days before the franchise sale. owners must own at least 25% interest in franchisor and have had such interest for at least 2 years up to 60 days before sale.

31. 31 If a franchisor can qualify for an exemption, how can it deal with state law issues?

32. 32 1.Avoid all states with a franchise registration or disclosure law.

33. 33 2.Qualify for exemptions from state business opportunity laws by obtaining a US trademark registration

34. 34 Washington Montana Oregon Idaho Nevada California Wyoming Utah Arizona Colorado New Mexico Oklahoma Texas Kansas Nebraska South Dakota North Dakota Minnesota Iowa Missouri Wisconsin Michigan Illinois Indiana Ohio Kentucky Tennessee Arkansas Louisiana Mississippi AlabamaGeorgia Florida South Carolina North Carolina Virginia West Virginia Pennsylvania New York Maine New Hampshire Vermont Mass. Rhode Island Connecticut New Jersey Delaware Maryland Puerto Rico Alaska Hawaii Business Opportunity States Requiring Franchisor Filing If No U.S. Registered Trademark

35. 35 If Franchisor: 1.has a US trademark registration, and 2.does not guaranty success or promise refunds if franchisees are not happy and, 3.it qualifies for an FTC Rule Exemption Only 3 state business opportunity laws require disclosure.

36. 36 Washington Montana Oregon Idaho Nevada California Wyoming Utah Arizona Colorado New Mexico Oklahoma Texas Kansas Nebraska South Dakota North Dakota Minnesota Iowa Missouri Wisconsi n Michigan Illinois Indiana Ohio Kentucky Tennessee Arkansas Louisiana Mississippi AlabamaGeorgia Florida South Carolina North Carolina Virginia West Virginia Pennsylvania New York Maine New Hampshire Vermont New Jersey Delaware Maryland Puerto Rico Alaska U.S. Virgin Islands Oklahoma Texas Utah California Nebrask a Washington States Requiring Franchise Registration and/or Disclosure Hawai i Business Opportunity States Which Require Exempt Franchisors to Provide Disclosure

37. 37 So, if you qualify for an exemption but do not have a US registered trademark you may grant franchises without disclosure in the “white States.

38. 38

39. 39 With a US trademark registration A franchisor must register in the “yellow” states; and disclose in the “blue” state In 32 states no disclosure or registration is required (although a few exemption notices may be required).

40. 40 Washington Montana Oregon Idaho Nevada California Wyoming Utah Arizona Colorado New Mexico Oklahoma Texas Kansas Nebraska South Dakota North Dakota Minnesota Iowa Missouri Wisconsi n Michigan Illinois Indiana Ohio Kentucky Tennessee Arkansas Louisiana Mississippi AlabamaGeorgia Florida South Carolina North Carolina Virginia West Virginia Pennsylvania New York Maine New Hampshire Vermont New Jersey Delaware Maryland Puerto Rico Alaska U.S. Virgin Islands Oklahoma Texas Utah California Nebrask a Washington States Requiring Franchise Registration and/or Disclosure Hawai i Business Opportunity States Which Require Exempt Franchisors to Provide Disclosure

41. 41 State Franchise Registration No law changes since Amended Rule release, but Only the FDD may be used for disclosures. FTC interpretations of FDD disclosure requirements should increase consistency of state reviews.

42. 42 Litigation Fear Not addressed by FTC Rule Most small franchisors do not have litigation Leegin decision of US Supreme Court allowing vertical price fixing claims to be evaluated under a “rule of reason” may reduce franchise “price fixing claims” No material threat of franchise legislation exists Rhode Island enacted a franchise relationship law in 2007, the first state to do in 15 years.

43. 43 The FTC Welcomes You to the USA

44. 44 Thank you Carl E. Zwisler Haynes and Boone, LLP 1615 L Street, NW, Suite 800 Washington, DC 20036-5610 Telephone 202-654-4540 Facsimile 202-654-4270 carl.zwisler@haynesboone.com