New York State Franchise Registration: FDD Registration

New York Franchise and FDD Registration FAQ’s

Who Regulates Franchises in New York?

The New York Attorney General regulates and oversees enforcement of the New York State Franchise Act and New York’s Franchise Regulations.

Where are New York FDD Registration and Renewal Applications Filed?

Applications for initial FDD registration, annual renewals, and amendments are filed at:

New York State Department of Law

Investor Protection Bureau
28 Liberty Street, 21st Floor
New York, NY 10005

Their telephone number is (212) 416‐8236

What Should I Include with My New York Franchise Registration Application?

The franchise registration application should include:

• Registration fee of $750 for initial franchise registrations or $150 for renewal franchise registrations payable to "The New York State Department of Law";

• Uniform Franchise Registration Application with Certification Form;

• Franchisor's Cost and Source of Funds Form;

• Consent to Service of Process Form;

• Sales Agent Disclosure Form;

• Guarantee of Performance Form (required only if financial statements of an affiliated company are included in the FDD); and

• Franchise Disclosure Document, also referred to in New York as an Offering Circular, in print and in an electronic version contained on a read-only CD.

What Are the Fees for Franchise Registration Applications in New York?

The initial filing fee for FDD registration is $750 and the renewal and amendment filing fee is $150.

What Financial Statements Are Required for New York FDD Registration?

New York requires audited financial statements and does not recognize or allow start-up franchisors to use an unaudited opening balance sheet. Unlike many other states that recognize the FDD audited financial statement phase-in process permitted under the Federal Franchise Laws. For start-up franchisors new to franchising and within their first year of offering franchises, the initial FDD and registration application must include an audited balance sheet. Thereafter, annual renewal requires the inclusion of three years of audited financial statements comprised of "statement of operations (profit and loss statements)", "statement of stockholders equity", and "statement of cash flows".

If the year-end audited financial statements included in your New York FDD registration application were issued more than 90 days prior to your registration application, you will also be required to submit an unaudited balance sheet and statement of operations within 90 days of your application date.

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

The length of time that it takes for your FDD registration application to be approved depends on the completeness of your registration application and FDD. Upon filing your application and FDD will be assigned to an examiner / principal accountant at the Franchise Section of the Investor Protection Bureau. The New York examiners are proficient, provide timely notification and are extremely responsive to inquiries. After the filing of your registration application, within one to two weeks you will receive a confirmation letter acknowledging that your registration application has been received, the examiner that your application has been assigned to and your file number. Within 8-12 weeks of your registration application you will receive a letter from the examiner advising of updates and/or changes required by the State of New York. Typical reasons for a delay in your registration will relate to incompleteness of your FDD and your failure to address items raised by the examiner. When registered you will receive a letter from the examiner advising of the registration of your FDD and the effective date of your registration.

When Must I Renew My New York FDD Registration?

No less frequently than annually and not later than within 120 days of the end of your fiscal year.

When Do I Have to Amend My New York FDD?

Under both the Federal and New York State Franchise Laws there are various triggers that will require you to amend your FDD and FDD registration prior to your annual renewal requirement. The most common reasons for an amendment relate to material changes in your FDD, your franchise offering or events that would render your existing FDD misleading.

New York Registration is Mandatory if Your Franchise Company Operates in New York

Under the New York Franchise Sales Act, NY Gen. Bus. Law Section 683(1), the jurisdictional reach of New York’s franchise law is expansively applied to all franchises sales, no matter the residence of the franchisee or the location of the franchised business, where the franchise “sale”, “offer”, “offer to sell” or “acceptance” occurs in the State of New York or is made from the state of New York.

• Offer or Offer to Sell - Under NY Gen. Bus. Law Section 681(11): an “Offer or offer to sell includes any attempt to offer to dispose of, or solicitation of any offer to buy, a franchise or interest in a franchise for value.”

• Offer or Sale of a Franchise - Under NY Gen. Bus. Law Section 681(12)(a): “An offer or sale of a franchise is made in [New York] when an offer to sell is made in [New York], or an offer to buy is accepted in [New York], or, if the franchisee is domiciled in [New York], the franchised business is or will be operated in [New York].”

• Offer to Sell - Under NY Gen. Bus. Law Section 681(12)(b): “An offer to sell is made in [New York’ when the offer either originated from [New York] or is directed by the offeror to [New York] and received at the place to which it is directed. An offer to sell is accepted in [New York] when acceptance is communicated to the offeror from [New York].”

Based on the expansive application of New York franchise law, franchisors that are based in and conduct their franchise sales operations from New York will trigger application of New York law (including New York’s FDD registration requirements) for out of state franchise sales, i.e., to residents of another state and where the franchised business will be operated outside the state of New York. In JM Vida, Inc. v. Texdis USA, Inc., 764 F.Supp 2d 599 (2011) the Southern District of New York held that a New York forum selection clause within the franchise agreement is not, by itself, subject the franchisor to the jurisdictional requirements of the New York Franchise Sales Act where the franchise offer and sale occurred entirely outside the State of New York and to a franchisee located outside of the State of New York and a resident of another state. Likewise, in Schwartz v. Pillsbury, Inc., 969 F.2d 840 (9th Cir. 1992) a case cited to by the court in JM Vida, Inc., the 9th Circuit held that a franchisor’s incorporation in the State of New York, by itself, is insufficient to subject a franchise transaction to the requirements of the New York Franchise Sales Act, i.e., the court in Schwartz rejected the application of the New York Franchise Sales Act where even though the franchisor was incorporated in the State of New York, “no part of [the franchise sales] transaction occurred in New York”, the franchisees were California residents, and the “franchised ice cream shop was located in California.”

Does New York Impose Financial Assurance Requirements?

Unlike many other franchise registration states, New York does not impose financial assurance requirements. If the financial statements for your franchise company indicates that you maintain insufficient shareholders equity or working capital, rather than imposing a financial assurance requirement such as requiring the deferral of the initial franchise fee, New York will require that you include a risk factor on the state cover page. The following is a sample of what the risk factor may look like:

THE FRANCHISEE WILL BE REQUIRED TO MAKE AN ESTIMATED INITIAL INVESTMENT RANGING FROM $____ TO $____. THIS AMOUNT EXCEEDS THE FRANCHISOR’S STOCKHOLDERS EQUITY THAT AS OF ____ IS $____.

Are There Exemptions to New York FDD Registration Requirements?

Yes, in certain limited instances New York recognizes exemptions to the franchise registration process. These limited exemptions and registration exemptions and but do not negate your obligation to properly disclose an FDD to your prospective franchisee. Limited FDD registration exemptions include limited transactions that meet certain threshold requirements such as to the net worth of the franchisor and the limited one-time isolated franchisee sale exemption.

What is New York’s Isolated Sale FDD Registration Exemption?

New York’s isolated sale exemption is an extremely limited exemption from New York’s FDD registration requirement. It is intended to apply to a circumstance where a franchisor, for the first time and not as a result of general solicitations to offer or sell franchises in New York, intends to sell a franchise in New York to a single franchisee through an offer that is directed at "...not more than two persons." Basically, if one potential franchise sales transaction, for the first time ever and without any prior sales activity or solicitations by the Franchisor (and its agents), is presented to a Franchisor then, potentially, the franchisor may - in this one isolated instance - engage in this New York franchise transaction prior to or without FDD registration in NY. This exemption is largely self regulating (i.e., there is no exemption application to be filed with New York and New York will not confirm that the exemption applies) and there are a number of steps that must be followed including the filing of a consent to service with New York. Even if this exemption applies, it is only an exemption as to “registration” and you must still ensure that you properly disclose the franchisee with an updated and current FDD that complies with and meets the requirements of New York law.

The isolated sales exemption is not widely understood and franchisors should be extremely careful. You should carefully review this exemption with your attorney before relying on it, as this exemption is extremely limited in application.

What is New York’s Existing Franchisee FDD Registration Exemption?

New York’s existing franchisee exemption is an exemption to New York’s FDD registration requirement when a franchisor sells an additional franchise to an existing franchisee. This exemption applies when the franchise being sold is to an existing franchisee. This is an exemption to registration only and, as a franchisor, you must still disclose your existing franchisee with your then current and compliant FDD. To apply:

1. The existing franchisee buyer must actively operate a franchise of the selling franchisor for the eighteen months preceding the offer;

2. The existing franchisee buyer is purchasing this additional franchise for the purpose of operating the franchised business and not for the purpose of a third-party resale; and

3. As the franchisor, you must report the franchise sale to the New York Department of Law on the form required by the Department within 15 days of the franchise sale.

You should always be cautious when relying on franchise registration exemptions and carefully examine whether or not the exemption applies to your transaction.

What is New York’s Net Worth FDD Registration Exemption?

New York's net worth franchise registration exemption applies to franchisors who meet a minimum financial "net worth" criteria. The exemption only applies to FDD registration and does not exempt a franchisor from its FDD disclosure obligations.

The net worth exemption applies if: (1) The franchisor has a net worth on a consolidated basis - according to its most recent financial statement - of not less than $15 million; and (2) The franchisor has a net worth - according to its most recent audited financial statement - of not less than $3 million and is at least 80% owned by a corporation which has a net worth on a consolidated basis of not less than $15 million.

Franchise Sales Advertising Precautions to Consider Under New York Law

Due to the broad scope and application of New York's Franchise laws, franchisors who have not registered their FDD in New York need to be aware of the possibility of inadvertently triggering New York franchise regulation through "broadcast internet communications" that reaches a New York resident. That is, an internet advertisement may unintentionally constitute an illegal offer to sell a franchise in New York.

To address this issue New York Law provides specified "safe harbor" disclaims that Franchisors should consider and discuss with their franchise lawyer. 13 NYCRR § 200.13 states:

Any communication made through the Internet, the World Wide Web, or any other similar proprietary or common carrier electronic delivery system, of an offer to sell a franchise that is not registered in New York, ("Internet Offer") (A) is exempt from registration provisions, (B) will not be in violation of the registration provisions, (C) can meet a safe harbor from the registration requirements if:

1. The offer indicates, directly or indirectly, that the franchise is not being offered to residents of this state.

2. The offer is not otherwise directed to any person in this state by or on behalf of the franchisor or anyone acting with the franchisor's knowledge; and

3. No franchise is sold in this state by or on behalf of the franchise or until the offering has been registered and declared effective and the Uniform Franchising Offering Circular has been delivered to the offeree before the sale in compliance with Article 33 of the General Business Law, the New York Franchise Act. When planning out your website, advertisements and franchise sales media it is critical to assess state regulations and insure that you implement the necessary disclaims.

What Creates a Franchise Relationship: Important Definitions Under New York Franchise Law?

Franchise - Under New York law the term “franchise” is defined as: a contract or agreement, either expressed or implied whether oral or written, between two or more persons by which:

1. A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor, and the franchisee is required to pay, directly or indirectly, a franchise fee, or

2. A franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliate, and the franchisee is required to pay, directly or indirectly, a franchise fee.

Franchise Fee - Under New York law the term “franchise fee” is broadly defined as:

"...includes but is not limited to, payments that are made before, upon, or after execution of an agreement to purchase, process, resell, or otherwise distribute a manufacturer's, a distributor's, or a licensor's goods, services, equipment, inventory, or real estate." The word "payment," includes those made in the form of a lump sum, installments, periodic royalties, profits, cash flow, or those reflected in the price of goods, services, equipment, inventory, or real estate sold or leased by the manufacturer or licensor to the distributor or licensee respectively.

Marketing Plan - Under New York law the term “marketing plan” is defined as "advice or training” that is provided by one party to the other pertaining to the sale of any product, equipment, supplies, or services. The advice or training includes preparing or providing:

1. Promotional literature, brochures, pamphlets, or advertising materials;

2. Training regarding the promotion, operation, or management of the franchise; or

3. Operational, managerial, technical, or financial guidelines or assistance.

These definitions are important because franchise relationships arise in new York when there is a “franchise fee” and a “marketing plan”. Unlike many other states, New York does not require the “license of a trademark” as an element for creating a franchise relationship.

Need assistance registering your FDD? Give us a call at (718) 979-8688 or contact us.