Insights into Franchise Registration Requirements in Illinois

Robert Tingler, Franchise Bureau Chief with the state of Illinois Attorney General Office, discusses franchise registration requirements with the Blue MauMau franchisee investment community.

Blue MauMau: Can a franchisor offer or solicit franchises without registration?

Tingler: Registration is only required on the state level by a small number of states. Therefore, sales activity can take place in non-registration states as long as FTC regulations are complied with regarding the disclosure document contents and the various delivery requirements for this document.

The state registration and advertising requirements differ from state to state.

The Franchise Disclosure Act [of Illinois] prohibits the offer or sale of any covered franchise prior to registration. The Illinois Act applies to sales directed to or made with Illinois residents. If the prospect is an Illinois resident, this fact alone would require registration.

Q: What constitutes an "offer" in Illinois?

Tingler: What constitutes an offer or sale is found in both the Act and the rules. Section 3(12) of the Act defines an “offer” or “offer to sell” as an “attempt to offer to dispose of, or solicitation of an offer to buy, a franchise, any interest in a franchise or an option to acquire a franchise for value.”

Advertising in Illinois would certainly qualify as “solicitation of an offer to buy,” if it is directed to Illinois residents or personal contact with prospects results.

Q: So soliciting or offering a franchise would include marketing and advertising. It is not just limited to meeting with sales persons.

Tingler: A franchisor will usually argue that until it makes an offer or is ready to close a sale, the franchisor should not be required to register.

[However] “Sales activity” requiring registration consists of directing advertising to Illinois residents or direct contact with an Illinois prospect, whether instigated by the franchisor or by the franchisor and the franchisee contacting each other.

If advertising is compliant with the print media and Internet provisions of the Franchise Disclosure Act and rules, and actual contact results only in the franchisor taking the name and contact information from the Illinois prospect and advising that person that when the franchisor is registered in Illinois, the franchisor will call the prospect back, no violation has occurred.

Q: What about the Internet? In Cyberspace, ads are broadcast everywhere. How can the state of Illinois block out Internet solicitations read by its residents, along with everyone else in this country and planet?

Tingler: In Illinois the franchisor can advertise on its website, whether or not it is registered in Illinois or any other state, as long as “. . . the franchisor limits contact with prospective Illinois franchisees to keeping a prospect list and notifying such prospects that, until the franchisor registers the franchise in Illinois, no further discussion about the franchise opportunity can take place.” Rule §200.306 enacted pursuant to the Illinois Franchise Disclosure Act. Also see the attached excerpt (pdf file) from a chapter I wrote about the Act.

If the franchisor does not send literature, correspondence or other information describing the advantages of buying a franchise to a particular Illinois resident, and if contacted by a prospect the franchisor only records contact information for such a person, registration is not required. It would also be misleading for a franchisor to indicate on its website or elsewhere that territories are available in Illinois if the franchisor has not already registered in Illinois.

Q: How Long Does It Take for Registration in Illinois?

Tingler: The time period to get registered in Illinois is 21 days, IF the person drafting the required documents is experienced. If the filing is materially deficient, the franchise has up to 90 days to correct the deficiencies, which if still not compliant, with one exception, will result in the applicant having to pay a new fee and start over. Taking into account the new disclosure format, even some experienced preparers may have corrections to make.