What Do The Amendments To The Franchise Rule Mean For Franchisor’s?

The Federal Trade Commission (“FTC” or “Commission”) is amending its Trade Regulation Rule entitled “Disclosure Requirements and Prohibitions Concerning Franchising” (“Franchise Rule” or “Rule”). 16 CFR 436.  The Franchise Rule requires franchise sellers to make certain material disclosures to give purchasers the information they need in order to weigh benefits and risks before investing.  The Rule was originally promulgated on December 21, 1978, 43 FR 59614.

The 2007 amendments to the Rule that took effect on July 1, 2008, provided for three exemptions based on financial thresholds. The new inflation modifications will take effect on July 1, 2012.

Pursuant to the 2007 amendments, the Franchise Rule provided for three exemptions based on a financial threshold:

(1) sales where the franchisee’s (buyer’s) initial payment is less than $500;

(2) initial investments totaling $1 million , excluding “the cost of unimproved land and any financing received from the franchisor or an affiliate”; and

(3) sales to franchisee’s that have been in business for a minimum of five years and have a minimum net worth of $5 million.

16 CFR 436.8.

The current amendments will adjust the monetary thresholds set forth in the foregoing section of the Rule as follows:

(1) in paragraph (a)(1), “$500” is replaced with “$540”;

(2) in paragraph (a)(5)(i), all references to $1 million are replaced with “$1,084,900”; and

(3) in paragraph (a)(5)(ii), “$5 million”  is replaced with “$5,424,500”.

Id.

The reason that this amendment was promulgated was that the Franchise Rule requires the FTC to “adjust the size of the monetary thresholds every fourth year based upon the Consumer Price Index . . . [which] means the Consumer Price Index for all urban consumers published by the Department of Labor.” 16 CFR 436.7(b).

The Commission works to protect consumers from unfair or burdensome business practices. As such, the revised monetary thresholds address the need to continuously modify trade regulation rules that outline business acts or practices affecting commerce.

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