PROPOSED RULES
FINANCIAL INSTITUTIONS
(Securities Division)
Original Notice.
Preproposal statement of inquiry was filed as WSR 08-14-066.
Title of Rule and Other Identifying Information: The securities division is proposing the amendment of the franchise registration rules set forth in chapter 460-80 WAC to take into account the amended franchise disclosure rules adopted by the Federal Trade Commission (FTC) and to adopt the instructions for the preparation of the franchise disclosure document promulgated by the North American Securities Administrators Association, Inc. Further, the division is proposing updates to reflect current practices and filing requirements, to codify several interpretive and policy statements, and to make minor corrections.
Hearing Location(s): State of Washington, Department of Financial Institutions, 150 Israel Road S.W., Room 319, Tumwater, WA 98501, on October 28, 2009, at 1:00 p.m.
Date of Intended Adoption: October 29, 2009.
Submit Written Comments to: Faith L. Anderson, Associate General Counsel, Department of Financial Institutions, Securities Division, P.O. Box 9033, Olympia, WA 98507-9033, e-mail fanderson@dfi.wa.gov, fax (360) 704-6480, by October 28, 2009.
Assistance for Persons with Disabilities: Contact Carolyn Hawkey, P.O. Box 9033, Olympia, WA 98507-9033, by October 23, 2009, TTY (360) 664-8126 or (360) 902-8824.
Purpose of the Proposal and Its Anticipated Effects, Including Any Changes in Existing Rules: The securities division is proposing amendments to its franchise registration rules set forth in chapter 460-80 WAC in light of the amended franchise disclosure rules adopted by the FTC in 2007 and their preemptive effect on state laws, as well as to better coordinate our rules with other states that regulate the offer and sale of franchises through the adoption of the instructions for the preparation of the franchise disclosure document in the 2008 Franchise Registration and Disclosure Guidelines promulgated by the North American Securities Administrators Association, Inc. The securities division is also proposing to codify several interpretive and policy statements. The proposed amendments to chapter 460-80 WAC include:
| • | Adoption of the FTC franchise disclosure document as the required format for disclosure; |
| • | Update of the franchise registration application requirements; |
| • | Adoption of new sections to specify franchise registration amendment and renewal requirements; franchise agreement addendum requirement; and the acceptability of guarantees of performance, surety bonds, deferrals and other arrangements in lieu of an impound; |
| • | Repeal of outdated sections on franchise offering circulars and purchase receipts; |
| • | Update of financial statement and franchise disclosure document receipt requirements; |
| • | Codification of interpretive and policy statements concerning the determination of the filing date, the requirements for requesting interpretive and no-action letters, and advertising of franchise via the internet; and |
| • | Other minor updates and corrections. |
Reasons Supporting Proposal: The proposed amendments to chapter 460-80 WAC should be adopted to conform to the amended FTC franchise disclosure requirements, to provide greater uniformity with other states, and to make appropriate updates.
Statutory Authority for Adoption: RCW 19.100.250, 19.100.010, 19.100.030, 19.100.040, 19.100.050, 19.100.070, 19.100.080, 19.100.100, 19.100.110.
Statute Being Implemented: Chapter 19.100 RCW.
Rule is necessary because of federal law, [no further information supplied by agency].
Name of Proponent: Department of financial institutions, governmental.
Name of Agency Personnel Responsible for Drafting: Faith L. Anderson, 150 Israel Road S.W., Olympia, WA 98501, (360) 725-7825; Implementation: Scott Jarvis, 150 Israel Road S.W., Olympia, WA 98501, (360) 902-8700; and Enforcement: Michael E. Stevenson, 150 Israel Road S.W., Olympia, WA 98501, (360) 902-8824.
No small business economic impact statement has been prepared under chapter 19.85 RCW. If any costs are borne by businesses in connection with the proposed rules, these costs will be no more than minor. As such, the agency is not required to prepare a small business economic impact statement under RCW 19.85.030.
A cost-benefit analysis is not required under RCW 34.05.328. The department of financial institutions is not one of the agencies listed in RCW 34.05.328.
September 14, 2009
Scott Jarvis
Director
OTS-2615.4
NEW SECTION
WAC 460-80-050
Document filed with the director when
received.
A document is filed with the director when it is
received by the director or by a person as the director
designates by rule or order.
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(1) The request must be submitted to the director in writing. The letter should be captioned with the name of the party who will be relying upon the director's response and should indicate that a no-action letter or interpretive opinion is sought.
(2) The requesting letter should cite the particular statutes or rules for which interpretation or no-action is sought.
(3) The names of all involved companies and parties should be disclosed. The director does not issue interpretive or no-action letters relating to unnamed companies or individuals or hypothetical situations, nor on matters of pending, or in preparation for, litigation.
(4) The request should be tailored to resolving the immediate issues and should not attempt to discuss every possible situation that may arise in the future.
(5) The letter should be concise and contain all material facts necessary to resolve the issues at hand. Relevant supporting documents may be included, but are not a substitute for subsection (6) of this section.
(6) It is important that the letter identify the issues at hand, the proposed resolution, and the precedents or other legal authority supporting that position.
The director may decline to respond to letters that are not prepared in accordance with the above listed procedures.
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[Order 11, § 460-80-100, filed 3/3/72.]
(1) Any bank as defined in section 3 (a)(2) of the
Securities Act of 1933, or any savings and loan association or
other institution as defined in section 3 (a)(5)(A) of the
Securities Act of 1933 whether acting in its individual or
fiduciary capacity; any broker or dealer registered pursuant
to section 15 of the Securities Exchange Act of 1934; any
insurance company as defined in section 2(13) of the
Securities Act of 1933; any investment company registered
under the Investment Company Act of 1940 or a business
development company as defined in section 2 (a)(48) of that
act; any small business investment company licensed by the
U.S. Small Business Administration under section 301 (c) or
(d) of the Small Business Investment Act of 1958; any plan
established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or
its political subdivisions, for the benefit of its employees,
if such plan has total assets in excess of $5,000,000; any
employee benefit plan within the meaning of ((Title I of)) the
Employee Retirement Income Security Act of 1974, if the
investment decision is made by a plan fiduciary, as defined in
section 3(21) of such act, which is either a bank, savings and
loan association, insurance company, or registered investment
adviser, or if the employee benefit plan has total assets in
excess of $5,000,000 or, if a self-directed plan, with
investment decisions made solely by persons that are
accredited investors;
(2) Any private business development company as defined in section 202 (a)(22) of the Investment Advisers Act of 1940;
(3) Any organization described in section 501 (c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the franchise offered, with total assets in excess of $5,000,000;
(4) Any director, executive officer, or general partner of the franchisor of the franchises being offered or sold, or any director, executive officer, or general partner of a general partner of that franchisor;
(5) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000;
(6) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;
(7) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the franchise offered, whose purchase is directed by a sophisticated person as described in 17 CFR Sec. 230.506 (b)(2)(ii); and
(8) Any entity in which all of the equity owners are accredited investors.
[Statutory Authority: RCW 19.100.250. 92-02-054, § 460-80-108, filed 12/30/91, effective 1/30/92.]
[Statutory Authority: RCW 19.100.040(12), 19.100.070(2) and 19.100.250. 80-04-036 (Order SDO-38-80), § 460-80-110, filed 3/19/80; Order 11, § 460-80-110, filed 3/3/72.]
(1) Completion of application. An application for registration of the offer or sale of franchises shall include the following, all of which shall be verified by means of the prescribed signature page:
(a) ((Facing page)) Application;
(b) Supplemental information page(s);
(c) ((Salesmen)) Seller disclosure form;
(d) A copy of the ((proposed offering circular))
Franchise Disclosure Document.
(2) The following shall be attached to the application:
(a) ((A second copy of the proposed offering circular;
(b) A cross-reference sheet showing the location in the franchise agreement of the information required to be included in the application and in the offering circular. If any item calling for information is inapplicable or the answer thereto is in the negative and is omitted, a statement to that effect shall be made in the cross-reference sheet;
(c))) A consent to service of process; and
(((d) Two copies)) (b) One copy of any advertising to be
used in connection with the offer or sale in this state of
franchises.
(3) ((Definitions:
(a) "Predecessor," for the purposes of the disclosure required by item 1 in the body of the offering circular, is defined as follows: A "predecessor" of a franchisor is (i) a person the major portion of whose assets have been acquired directly or indirectly by the franchisor, or (ii) a person from whom the franchisor acquired directly or indirectly the major portion of its assets;
(b) "Franchise broker," for the purposes of the disclosure required by the cover page and item 2 in the body of the offering circular, is defined as follows: A "franchise broker" is any person engaged in the business of representing a franchisor or subfranchisor in offering for sale or selling a franchise, except anyone whose identity and business experience is otherwise required to be disclosed at item 2 in the body of the offering circular.
(4))) Disclosure: ((Each disclosure item should be
either positively or negatively commented upon by use of a
statement which fully incorporates the information required by
the item.)) The offering circular shall be prepared in
accordance with the Instructions for Preparation of the
Franchise Disclosure Document contained in section IV. of the
2008 Franchise Registration and Disclosure Guidelines
promulgated by the North American Securities Administrators
Association, Inc. (NASAA).
(((5))) (4) Subfranchisors: When the person filing the
application for registration is a subfranchisor, the
application shall also include the same information concerning
the subfranchisor as is required from the franchisor; the
franchisor, as well as the subfranchisor, shall execute a
signature page.
(((6))) (5) Signing of application: The application
shall be signed by an officer or general partner of the
applicant; however, it may be signed by another person holding
a power of attorney for such purposes from the applicant. If
signed on behalf of the applicant pursuant to such power of
attorney, the application shall include as an additional
exhibit a copy of said power of attorney or a copy of the
corporate resolution authorizing the attorney to act.
(((7))) (6) Manually or digitally signed consent of
accountant: All applications shall be accompanied by a
manually or digitally signed consent of the independent public
accountants for the use of their audited financial statements
as such statements appear in the offering circular.
(((8) Application to amend the registration: An
amendment to an application filed either before or after the
effective date of registration shall contain only the
information being amended identified by item number and shall
be verified by means of the prescribed signature page. Each
amendment shall be accompanied by a facing page in the form
prescribed on which the applicant shall indicate the filing is
an amendment and the number of the amendment, if more than
one.
(9) Underscoring of changes: If the registration renewal statement or any amendment to an application for registration alters the text of the offering circular, or of any item, or other document previously filed as a part of the application for registration, the changes in such text shall be indicated by means of underscoring or in some other appropriate manner.))
[Statutory Authority: RCW 19.100.250. 92-02-054, § 460-80-125, filed 12/30/91, effective 1/30/92; 80-04-036 (Order SDO-38-80), § 460-80-125, filed 3/19/80.]
(1) An application for renewal of a franchise registration must be filed with the director no later than fifteen business days prior to the expiration of registration in order to avoid a lapse in registration and the need to file an initial application for registration. If the registration has already expired, the applicant must mark the application as an initial registration and pay the fee required for filing an initial application for registration in RCW 19.100.240.
(2) An amendment to a franchise application is required to be filed as soon as reasonably possible and in any case, before the further sale of any franchise, if a material adverse change in the condition of the franchisor or any of its subfranchisors or any material change in the information contained in its Franchise Disclosure Document should occur.
(3) The following documents must be filed for each amendment or application for renewal of a franchise registration:
(a) A completed application marked amendment or renewal, as applicable. If the application is for renewal, do not mark the amendment boxes on the application even if the documents have been revised since the last filing.
(b) All documents set forth in WAC 460-80-125 required for an initial application with all additions, deletions and other changes to the previously filed documents black-lined. Changes must be clearly marked so that each change is noticed easily. Do NOT use margin balloons or color highlights to show changes. Do not use less than 11 point type for changed text. Use a black-lining system that underlines changes and shows deletions by a strike through.
(c) A clean copy of the updated Franchise Disclosure Document.
(4) If the director requires changes to any documents submitted, the franchisor must file a complete clean copy of the revised Franchise Disclosure Document and any other revised documents, and a black-lined copy of all the revised pages, unless directed otherwise.
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(b) In extraordinary cases the director may waive the requirement for audited statements if the statements have been prepared by an independent certified public accountant or independent public accountant and the director is otherwise satisfied as to the reliability of such statements and as to the ability of the franchisor to perform future commitments. Such waiver will ordinarily be granted only upon a showing that the franchisor has not had prior audited statements; that the close of the most recent or current fiscal year is so near the time of filing of the application that it would be unreasonably costly or impractical to provide audited statements with the application; and that audited statements will be furnished within a reasonable time after the end of the most recent or current fiscal year. In such cases the director may impose an impound condition and such other conditions and restrictions as in his discretion may be appropriate.
(c) The use of unaudited financial statements as provided in these rules does not relieve the applicant or any person from any liability for false and misleading statements contained in such financial statements.)) The Franchise Disclosure Document must include financial statements that comply with the instructions for Item 21 of the Franchise Disclosure Document, 16 CFR § 465.5(u).
[Statutory Authority: RCW 19.100.040(7) and 19.100.250. 80-04-036 (Order SDO-38-80), § 460-80-140, filed 3/19/80; Order 11, § 460-80-140, filed 3/3/72.]
[Order 11, § 460-80-195, filed 3/3/72.]
CIRCULAR BY PROSPECTIVE FRANCHISEE FROM (NAME OF FRANCHISOR) |
[Statutory Authority: RCW 19.100.250. 80-04-036 (Order SDO-38-80), § 460-80-300, filed 3/19/80; Order 11, § 460-80-300, filed 3/3/72.]
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[Statutory Authority: RCW 19.100.250. 95-08-015, § 460-80-315, filed 3/24/95, effective 4/24/95; 92-02-054, § 460-80-315, filed 12/30/91, effective 1/30/92; 88-01-060 (Order SDO 112B-87), § 460-80-315, filed 12/17/87. Statutory Authority: RCW 19.100.040 (4), (7), and (20), and 19.100.250. 80-04-036 (Order SDO-38-80), § 460-80-315, filed 3/19/80.]
[Order 11, § 460-80-400, filed 3/3/72.]
[Order 11, § 460-80-410, filed 3/3/72.]
[Order 11, § 460-80-440, filed 3/3/72.]
((An application for an order of)) A request to the
director ((authorizing)) to authorize the release of impounds
to the franchisor shall ((be verified and shall)) contain the
following:
(((a))) (1) A statement of the franchisor that all
required proceeds from the sale of franchises have been placed
with the depository in accordance with the terms and
conditions of the impound ((condition)) agreement.
(((b))) (2) A statement of the depository signed by an
appropriate officer setting forth the aggregate amount of
impounds placed with the depository.
(((c))) (3) The names of each franchisee (or
subfranchisor) and the amount held in the impound for the
account of each franchisee (or subfranchisor).
(((d))) (4) A statement by the franchisee that the
franchisor has performed his obligations under the franchise
contract.
(((e))) (5) Such other information as the director may
require in a particular case.
[Order 11, § 460-80-450, filed 3/3/72.]
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(a) An advertisement should not contain any statement or inference that a purchase of a franchise is a safe investment or that failure, loss or default is impossible or unlikely, or that earnings or profits are assured.
(b) An advertisement should not normally contain a projection of future franchisee earnings unless such projection is (i) based on past earnings records of all franchisees operating under conditions, including location, substantially similar to conditions affecting franchises being offered (ii) for a reasonable period only and (iii) is substantiated by data which clearly supports such projections.
(c) An advertisement should normally contain the name and address of the person using the advertisement.
(d) If the advertisement contains any endorsement or recommendation of the franchises by any public figure, whether express or implied (for example, by the inclusion of such person's photograph or name in the advertisement), full disclosure shall be made of any compensation or other benefit given or promised by the franchisor or any person associated with the franchisor to such person, directly or indirectly. The disclosure required in this subsection (d) shall be made in the same document containing the advertisement or, if such advertisement is presented on radio or television, as a part of the same program, without any intermission or other intervening material.
(e) Any advertisement which refers to an exemption from or reduction in taxation under any law should be based on an opinion of counsel, and the name of such counsel should be stated in the advertisement)).
[Order 11, § 460-80-500, filed 3/3/72.]
(1) An advertisement shall not contain any statement or inference that a purchase of a franchise is a safe investment or that failure, loss, or default is impossible or unlikely, or that earnings or profits are assured.
(2) An advertisement should not normally contain a projection of future franchisee earnings unless such projection is:
(a) Based on past earnings records of all franchisees operating under conditions, including location, substantially similar to conditions affecting franchises being offered;
(b) For a reasonable period only; and
(c) Is substantiated by data which clearly supports such projections.
(3) An advertisement should normally contain the name and address of the person using the advertisement.
(4) If the advertisement contains any endorsement or recommendation of the franchises by any public figure, whether express or implied (for example, by the inclusion of such person's photograph or name in the advertisement), full disclosure shall be made of any compensation or other benefit given or promised by the franchisor or any person associated with the franchisor to such person, directly or indirectly. The disclosure required in this subsection shall be made in the same document containing the advertisement or, if such advertisement is presented on radio or television, as a part of the same program, without any intermission or other intervening material.
(5) Any advertisement which refers to an exemption from or reduction in taxation under any law should be based on an opinion of counsel, and the name of such counsel should be stated in the advertisement.
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(1) The franchisor discloses to the director the uniform resource locator ("URL") address or similar address or device identifying the location of the internet advertising:
(a) On the cover page of the Franchise Disclosure Document included with an application for registration that is effective in the state of Washington; or
(b) On a notice filed with the director within five business days after publication; and
(2) The internet advertising is not directed to any person in the state of Washington by, or on behalf of, the franchisor or anyone acting with the franchisor's knowledge.
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(1) The offer is made pursuant to an available and perfected exemption from franchise registration; or
(2) If the franchise is not registered or exempt:
(a) The internet offer indicates, directly or indirectly, that the franchises are not being offered to residents of Washington;
(b) The internet offer is not otherwise specifically directed to any person in this state by, or on behalf of, the franchisor or anyone acting with the franchisor's knowledge; and
(c) No franchises are sold in Washington by, or on behalf of, the franchisor until the offering is registered and declared effective and the Washington Franchise Disclosure Document has been delivered to the offeree before the sale and in compliance with the Franchise Investment Protection Act, chapter 19.100 RCW.
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The following sections of the Washington Administrative Code are repealed:
| WAC 460-80-310 | Offering circular. |
| WAC 460-80-430 | Purchase receipts. |