How to Understand FTC Regulations for Franchising

The Federal Trade Commission (FTC) became increasingly active in the franchise industry during the 1990s, when a rise in the number of franchises created a boom in the sale and procurement of franchising opportunities. As a security traded on the public market, franchises must adhere to strict trade regulations such as disclosure, designed by the FTC to prevent fraudulent activity among franchisors. However, the ability of the Federal Trade Commission to verify information on the Uniform Franchise Offering Circulars (UFOCs) is very limited, so the onus is on prospective franchisees to use their legal, accounting and banking resources for verification purposes concerning the information disclosed in these documents.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Legal counsel where available
• Computer with Internet access

1. Know that every franchise is required by the Federal Trade Commission to provide a Uniform Franchise Offering Circular containing financial and legal information about the organization and its owners to all prospective franchisees within 10 days of their subscription to the organization.

2. Read complete details concerning all members of a franchise, along with business, legal and financial history with your Uniform Franchise Offering Circular. The FTC requires full disclosure on all recent business undertakings of franchisers to appear in these documents and renders Franchise Agreements null in the event that these items are falsified or overlooked.

3. Understand the qualifications for accredited investors according to the SEC (U.S. Securities and Exchange Commission) before distributing Uniform Franchise Offering Circulars, or risk violating FTC regulations for sale and offering of securities. You can find a list of qualifications at the SEC Web site (see Resources below).

4. Invest in professional legal counsel to comply with strict Federal Trade Commission requirements to ensure your contracts are legal. You can search for an attorney specializing in franchise law through the FranchiseLaw.com Web site (see Resources below).

5. Understand that the Federal Trade Commission's jurisdiction is limited to the United States and its territories. In the event of international franchising, you will be at the mercy of foreign government regulation for any legal concerns that may arise.

Tips & Warnings

• If you can't afford a lawyer, take several hours to read through the actual text of the FTC regulations for franchising (see Resources below).
• If you disclose false information in the UFOC (Uniform Franchise Circulation Documents) to quell investor anxiety, you risk becoming fully liable for all monies invested and damages pertaining to time and effort spent by investors. The FTC requires full, accurate disclosure of franchisors and exercises a zero-tolerance policy for false claims on disclosure documents.

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