Exemption-Based Franchising in Indiana – Do you Qualify?

Exemption-Based Franchising in Indiana – Do you Qualify?
December 7, 2017 by Christina Laun Fugate, Partner
All franchises are governed by the Federal Trade Commission’s Federal Franchise Rule, which requires franchisors to create and provide to prospective franchisees a Franchise Disclosure Document (“FDD”) before they are legally permitted to sell a franchise. Fourteen states, including Indiana, have enacted state laws that require franchisors to register their FDDs with the state prior to offering or selling a franchise. Nine of these registration states provide some form of an exemption from the registration (and in some cases, disclosure) requirements. Indiana is one of them. This article provides an overview of exemptions that may apply to franchisors looking to offer their franchise business in the state of Indiana.

Single Franchise Exemption

The single franchise/isolated sales exemption applies if a franchisor sells no more than one franchise in the state of Indiana during any two-year period. This exemption applies to both the registration and disclosure requirements.

Exemption for Sale of Franchisee

A franchisor is considered exempt from the registration and disclosure requirements if the sale of the franchise is not made “by or through” the franchisor. In other words, this would apply to a sale by a franchisee of an existing franchise business. This exemption applies even if the franchisor has the right to approve or disapprove of the new prospective franchisee. 

Exemption by Order

The state of Indiana allows an exemption from registration and disclosure by administrative order. The Indiana Securities Commissioner has complete discretion to exempt a franchisor from the registration and disclosure requirements based on the public interest or protection of investors. On the flip side, the Commissioner also has the power to deny or revoke any statutory exemption.
 
Net Worth Partial Exemption

The Indiana legislature has relieved certain franchisors, by reason of net worth and number of franchisees, from the registration requirements. To qualify, the franchisor must have a minimum net worth of $5 million as established by the franchisor’s most recent financial statements. The franchisor can rely on its parent’s financial statements, provided the franchisor itself has a minimum net worth of $1 million. The parent company must own at least 80% of the franchisor.  In addition to the minimum net worth requirement, the franchisor must also establish either: it has at least 25 franchisees conducting business at all times during the five-year period immediately preceding the offer or sale or conducted the franchise business continuously for five or more years. If these requirements are met, the franchisor has to comply only with a limited disclosure requirement. 

The Experienced Franchisee

The Indiana legislature specifically excludes from its definition of a “franchise,” the experienced franchisee. A “franchise” does not include a contract where the franchisee has been in the business of the franchise system (or a similar business) for at least two years and the franchisee’s gross sales derived from the franchise business will not exceed 20% of the gross sales of all of the franchisee’s business operations within the first year of operation. Note this exclusion only applies to the definition of a “franchise” under the Indiana Franchise Act (“IFA”), which sets forth the registration and disclosure requirements. It does not apply to the Indiana Deceptive Franchise Practices Act (“IDFPA”), which is the franchise relationship law enacted to protect franchisees from certain unlawful practices by the franchisor. The experienced franchisee exclusion was added to the IFA after the IDFPA was enacted, and the Indiana legislature has not since amended the IDFPA to specifically incorporate the exclusionary language.

For more information, contact Christina Fugate another member of our Franchise and Distribution Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.




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