Washington State

House of Representatives

Office of Program Research

BILL

ANALYSIS

Business & Financial Services Committee

HB 2235

This analysis was prepared by non-partisan legislative staff for the use of legislative members in their deliberations. This analysis is not a part of the legislation nor does it constitute a statement of legislative intent.

Background:

A franchise is an agreement that grants the right to engage in a business under a marketing plan prescribed by the franchisor, the operation of which is substantially associated with a particular trade name or symbol.

The Franchise Investment Protection Act regulates the sale of franchises and the registration of franchisors. To sell or offer to sell a franchise, the franchisor must be registered with the Department of Financial Institutions (Department). An exception to the registration requirement applies where the franchisor meets certain requirements and delivers an offering circular to the prospective franchisee at least 10 business days prior to execution of the agreement. The offering circular must comply with the Department's guidelines, which are based on the North American Securities Administrators Association's Uniform Franchise Offering Circular. A franchise offering remains registered for one year and may be renewed by filing a renewal application 15 business days before the expiration of the registration.

It is unlawful for a person to sell a franchise this is registered or required to be registered without delivering the offering circular to the franchisee at least 10 business days prior to execution of the agreement.

The Director of the Department (Director) has the authority to issue a stop order to suspend or revoke a registration statement. The applicant has 15 days to request a hearing on entry of the stop order. In addition, the Director may issue a cease and desist order if it appears a person has violated or is about to violate the Franchise Investment Protection Act. The order becomes final if the person does not request a hearing within 15 days of receiving notice.

A Federal Trade Commission rule adopted in 2007, which applies to the offer or sale of a franchise to be located in the United States, uses terminology and deadlines that differ from Washington law.

Summary of Bill:

The term "disclosure document" is substituted for the term "offering circular." The Department's guidelines for preparation of the disclosure document must be based on guidelines of either the Federal Trade Commission or the North American Securities Administrators Association. The term "prospective franchisee" is substituted throughout the law for the term "offeree." Definitions are provided for the terms "file," "record," and "prospective franchisee."

To qualify for an exception from registration, a franchisor must deliver a disclosure document to the prospective franchisee 14 calendar days prior to execution of the agreement. A franchisor may renew the registration by filing an application 20 calendar days before expiration of the registration.

A franchisor must furnish a prospective franchisee with a copy of the disclosure document at least 14 calendar days prior to payment or execution of a binding agreement. It is unlawful for the franchisor to unilaterally and materially alter the terms and conditions of a franchise agreement without furnishing the prospective franchisee with a copy of the revisions at least seven calendar days before he or she signs the agreement. Changes that arise out of negotiations initiated by the prospective franchisee do not trigger this period.

A person has 20 calendar days to request a hearing on a stop order or cease and desist order.