The FTC Franchise Rule, as originally enacted in 2007 and effective July 1, 2008, required that franchise sellers provide a prospective franchisee with a franchise disclosure document unless:
(i) the prospective franchisee’s initial payment is less than $500;
(ii) the prospective franchisee’s initial investment is at least $1,000,000 (excluding the cost of unimproved land);
(iii) the prospective franchise sale is to a large entity that has been in business for at least five years and has a net worth of $5,000,000;
(iv) the franchise relationship is a fractional franchise;
(v) the franchise relationship is a leased department;
(vi) the franchise relationship concerns petroleum marketers and resellers, which would then be covered by the Petroleum Marketing Practices Act;
(vii) one or more of the purchasers is an insider; or
(viii) there is no written document that describes any material aspect of the franchise relationship.
If an exemption applied, the franchisor would not need to provide a franchise disclosure document to the prospective franchisee.
The FTC Franchise Rule specifically provided that the above referenced monetary thresholds are to be adjusted every four years to keep them in line with changes in the Consumer Price Index. Last month, amended monetary thresholds went into effect. Accordingly, as of July 1, 2012, the above monetary thresholds for exemptions to the FTC Franchise Rule have been increased as follows:
- the prospective franchisee’s initial payment is less than $540 (previously $500)
- the prospective franchisee’s initial investment is at least $1,084,900 (previously $1,000,000; also excludes the cost of unimproved land)
- the prospective franchise sale is to a large entity that has been in business for at least five years and a net worth of $5,424,500 (previously $5,000,000)