State Registration Examiner Speaks His Mind

A franchise examiner from a registration state shares insights after reading our 3-part series on franchisors skirting

Editor's Note: The name and state of the examiner have been removed. In understanding the examiner's comments, readers need to know that it is illegal for unregistered franchisors to solicit franchise opportunities to residents of registration states. Under such circumstances, the very most a franchisor should do when a buyer expresses interest is to take down the resident's name and tell him they will call back once they are registered in his state.

How do we state examiners know what franchisors we aren't catching?

"In my state we are always on the lookout for unregistered franchisors with sales activity. But how do we know what franchisors we are not catching? If we know who they are, we require compliance. If we see a website that makes improper representations, we ask that it be changed. In my state we warn franchisors against pre-registration sales activity. As soon as we became aware of a violation, we would take corrective action when an unregistered franchisor claimed to have available franchise locations here."

Franchisors marketing through the Internet that reach residents of my state MUST take contact information and get back to prospect only after registration

"My state's position on Internet advertising is that resulting contact with prospective franchisees must be limited to taking contact information and telling the prospect that after registering the franchisor will get back to the prospect. There is no way to monitor what words are in fact spoken between seller and prospect, unless much later the prospect complains to us when he wants to get out of the deal. Actual sales attempts have resulted in fines and actual unregistered sales can give a franchisee with buyer's remorse an opportunity to get out of the deal and often results in a fine for the illegal sale(s)."

"I don't believe the number of unregistered franchisors actively selling in my state are numerous, but here's that same riddle again; how can I know how common this is if I don't know who is doing it. Complaints from franchisees that claim one on one sales attempts or actual sales before registration are rare."

Franchisors not following the laws get bad reputations

"Several years ago it was common for new franchisors to use inexperienced franchise attorneys or not use them at all. However, franchisors would cooperate [with the state registrar] when issues emerged. Now when violations occur, we require that Notices of Violation be issued to existing franchisees; that a fine be paid; and that registration be effected before any further sales activity. We do get a large number of calls from prospects to verify whether a franchisor is registered, which indicates to me that buyers are doing better due diligence than they used to do. This also means that franchisors failing to follow our laws before registration will lose prospects that will not trust the franchisor, even after registration, and those same prospects will tell family, friends and other potential franchisees about this problem."

There are substantial problems nowadays with low quality preparation of disclosure documents

"Providing a disclosure document more than 14 days before closing the deal is only one part of the picture and could never justify violation of state registration requirements and/or federal/state content requirements for this document. Regarding the states, we see a very substantial problem with preparers of the UFOC, and now the FDD, who do very low quality work. The franchisor who fails to register is virtually certain to offer a substandard disclosure document to prospects. The no-harm, no-foul argument that disclosure was provided will never withstand scrutiny."

—

Related Readings:

• Part 1 of 3: Loosey Goosey Franchisor Registration
• Part 2 of 3. Widespread Registration Problem
• Part 3 of 3: Difficulty of Enforcing Registration
• Unlimited MedSearch Sells Franchises without Registering
• Registration (Franchipedia article from AAFD's Bob Purvin)
• Registration History (Franchipedia article)
• An Interview with Susan Kezios on Skirting Franchise Registration