Under the Federal Trade Commission’s (FTC) rule, Franchisors must update their franchise disclosure document (FDD) within 120 days from the close of the fiscal year. This update requirement is commonly referred to as the FDD annual update and includes such things as insertion of the previous year’s audit financials, updating of the listing of current franchisee, and numerous other items.
In parity with FTC rule’s annual update requirement, a little more than a dozen states require that the FDD be registered with the state prior to selling or offering franchise in that state. Commonly state registrations are effective for a one year period. In some states, the effective period for the registration runs parallel with the FTC’s 120 day annual update requirement, but in other states the effective period for the registration runs from the state of effectiveness. For example, in Illinois every franchise registration expires on April 30th, irrespective of when the franchise registration was filed. However, in Virginia, franchise registrations are effective for one calendar year from the date on which they become effective. So, if a Virginia state registration became effective on June 23, 2011, the Virginia state registration will expire on June 23, 2012.
The question becomes: if your state registration is still effective, can you still sell within the state prior to June 23, 2012, under the prior year’s FDD. The answer is No. This would be a breach of the FTC rule. And you cannot disclose franchisees or use the updated FDD within the state until it is registered. So, in order to sell or offer franchisees within the state, you must register the updated FDD with the state prior to selling franchises.
What if I do not intend to sell or offer franchises, do I still have to register with the state? The answer is No. If you are not offering or selling franchises within the state, you do not have to file or renew your franchise registration. However, if you choose not to renew an existing franchise registration, you will be subject to initial franchise fees, if and when you decide to register in the future. Initial franchise registration fees can be double or hundreds of dollars more than the franchise registration renewal fee.
Also, consider renewal and transfer situations. Whenever a franchisee signs a franchise agreement, the franchisee should be disclosed with the FDD even though they may not be per se a “new” franchisee.