Maryland Franchise Law and FDD Registration

Maryland Franchise Law and FDD Registration FAQs

What is Maryland's Franchise Law?

Maryland's franchise law, formally known as the "Maryland Franchise Registration and Disclosure Law," is comprised of a series of laws and regulations that govern the offer and sale of franchises in Maryland. Franchisors are required to register their FDD and comply with laws that regulate how franchises are sold and the the relationship between franchisors and franchisees. Maryland's franchise law can be found under the Maryland Code, Business Regulation Sections 14-201 to 14-233.

Who Regulates Franchises in Maryland?

The Securities Division of the Maryland Office of the Attorney General regulates and oversees enforcement of Maryland’s Franchise Registration and Disclosure Law.

What Should I Include with My Maryland Franchise Registration Application?

Your registration application should include:

• Application Fee of $500 for initial franchise registrations and $250 for renewal registrations. The filing fee must be made payable to the "Office of the Attorney General";

• Uniform Franchise Registration Application Page;

• Franchisor's Costs and Sources of Funds;

• Uniform Consent to Service of Process naming the Maryland Securities Commissioner as agent to receive service;

• Franchise Seller Disclosure Form;

• Franchise Disclosure Document with State Cover Page;

• Certification Page;

• Auditor's consent letter; and

• Copies of advertising and promotional materials.

Your Maryland registration application must comply with the Franchise Registration and Disclosure Guidelines published by NASAA and, effective January 1, 2020 must adopt and include the new NASAA Franchise State Cover Sheet.

What are Maryland's FDD Registration and Renewal Fees?

The initial FDD registration fee is $500 and the annual FDD renewal fee is $250. The fee for filing an FDD amendments is $100.

Where Is the FDD Registration Application Filed?

FDD registration applications must be filed with the Securities Division at the following address:

Securities Division

Office of the Attorney General

200 St. Paul Place, 20th Floor

Baltimore, MD 21202

The Division's telephone number is (410) 576-6360 and their email is securities@oag.state.md.us.

How Long Will It Take for My Registration Application to Be Approved?

The Maryland Securities Division actively responds to FDD registration and renewal applications. How long registration takes depends on how complete your application and FDD are. Once you submit your application, you will be assigned a franchise examiner and you will receive a confirmation letter in the mail with your file number. Within 30 days of your initial submission the examiner will review your FDD and application and will then submit to you a letter advising of deficiencies and changes required for registration. Once all deficiencies in the examiner’s comment letter are resolved, you will receive an email advising you that your FDD has been registered and indicating the effective date of your registration. Your registration must be renewed annually and not later than 120 days following the end of your most recent fiscal year.

When Do I have to Renew and Update My Maryland Registration?

FDD registration lasts for one year following the effective date of your registration. An application to renew your registration must be filed not less than 15 calendar days prior to the one year anniversary of your effective date.

Once registered you have a continuing obligation to update and amend your FDD - including the filing of an FDD amendment application if, during the period of your registration, there is a "material change" as to the information disclosed in your FDD. Under Maryland law, examples of some "material changes" that trigger an amendment requirement and the filing of an amendment application, include:

• The termination of more than 10% of your Maryland franchisees within any 3 month period;

• The termination of more than 5% of all franchisees - no matter the location - within any 3 month period;

• A reorganization of your franchise company;

• A franchisor change of control , corporate name, or state of incorporation;

• The commencement of a new product or service requiring additional investments by franchisees; and

• The discontinuance or modification of a product or service of the system accounting for at least 20% of the franchisors gross sales.

There are other examples and it is important to be aware that if there is a material change as to the accuracy and/or information disclosed in your FDD, an amendment is required.

How Current Do My Financial Statements Need to Be?

The audited financial statements included in Item 21 of your FDD must have been prepared and issued within 120 days of the date of your registration application with the State of Maryland.

Does Maryland Impose Financial Assurance Requirements?

Yes, Maryland is one of the franchise registration states that imposes financial assurance requirements. During the registration and renewal process the state examiner will review the financial statements disclosed in your FDD. The examiner will evaluate your assets, liabilities, shareholders equity, and working capital. If the examiner determines that you possess insufficient assets and capital to fulfill your franchisee obligations, your registration will be conditioned on your agreement and satisfaction of a financial assurance requirement such as the deferral or escrow of your initial franchise fees or the posting of a surety bond.

The standards and authorization for the imposition of financial assurance requirements is contained in the Maryland Franchise Law Section, Md. Business Regulation Code, 14-217. This section states:

... If the Commissioner finds that it is necessary and appropriate for the protection of prospective franchisees or subfranchisors because a franchisor has not made adequate financial arrangements to fulfill the franchisor's obligations under an offering, the Commissioner may require the franchisor to escrow franchise fees or other money paid by a franchisee or subfranchisor until the obligations have been satisfied.

What Actions Trigger Maryland FDD Registration Requirements?

What determines and triggers Maryland's FDD registration and disclosure requirements depends on the underlying franchise transaction. You must comply with Maryland's franchise laws and register you FDD with the state if your franchise transaction involves any one of the following circumstances: (a) your franchisee is a Maryland state resident; (b) you are granting rights to develop or operate the franchised business in the State of Maryland; or (c) an offer to sell a franchise or, acceptance of an offer, is made within the State of Maryland. When determining whether or not a franchise sale offer or acceptance occurs within the state, Maryland franchise law Section 14-203(b) states:

(b)(1) For purposes of this section, an offer to sell is made in the State if the offer:

(i) originates from the state; or

(ii) is directed by the offeror to the State and is received at the place to which it is directed.

(3) For purposes of this section, an offer to buy is accepted in the State when acceptance is communicated to the offeror in the State.

Generalized communications that are broadly distributed beyond the State of Maryland do not, by themselves, trigger Maryland's franchise regulation. For example under Maryland law, an advertisement in a newspaper or publication that reaches the State of Maryland but maintains at least two-thirds of its distribution outside of the State of Maryland does not, by itself, qualify as an offer to sell a franchise within the state. Franchisor's should carefully scrutinize all franchise sales transactions and marketing relative to Maryland and whether or not the franchisor maintains a registered FDD with the state.