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Advertising a franchise opportunity is not like advertising a product. When a franchisor promotes the sale of franchises, whether on a website, in a brochure, through a broker, or in a thirty-second social clip, that communication is regulated by the FTC and, in most states with franchise laws, by state rules with their own filing requirements, content mandates, and content prohibitions. Franchisors who publish advertisements without complying with these regulations expose themselves to significant liability under both state and federal law.

The Scope of “Advertisement” Under State Law

Understanding the full breadth of how these state laws define “advertisement” is key to appreciating the full scope of the laws. While definitions vary slightly from state to state, an “advertisement” for purposes of these laws generally is defined as:

The definition is clearly broad and encompasses a wide array of advertising mediums, including but not limited to:

Certain States Require Pre-Filing Before Publication

Of the fifteen states with franchise registration and/or disclosure laws, seven require franchisors to file advertisements with the state prior to publishing or disseminating to the public.

Depending on the state, and barring an applicable exemption, advertisements must be filed anywhere from three to seven days (business or calendar days, depending on the state) prior to publication. After filing, states may issue comments and/or condition publication on a specific change if an advertisement is found not to comply with the state’s franchise law.

Importantly, if the content of an advertisement changes after initial filing, it must be re-filed the required number of days before the revised version is published.

Advertisements Must Comply with Content Requirements/Prohibitions

With respect to content, many state franchise laws impose specific requirements and prohibitions – even when pre-filing is not required. For example, New York requires advertisements (referred to as “sales literature”) to include a legend explaining that the advertisement is not an offering and that an offering can only be made by the franchisor’s registered prospectus. Maryland and Minnesota require advertisements to identify the franchisor or person using or sponsoring the advertisement. Minnesota also requires the advertisement to include the registration number assigned to the offering by the state.

Regarding content prohibitions, many states prohibit advertisements from suggesting that a franchisee’s failure or loss resulting from purchasing the franchise is impossible or unlikely. Similarly, advertisements cannot promise, guarantee, or assure earnings or profits, or suggest that registration of the offering with the state means that the state has approved or endorsed the franchise.

Again, content that either must or cannot be included in an advertisement varies by state. It is crucial for franchisors to review advertisements for compliance with a particular state’s franchise law prior to publication. Failure to do so may expose the franchisor to liability under the state’s franchise law, and potentially under federal law.

Common Exemptions from Compliance

For as broad as these state advertising regulations are, they generally include several staple exemptions from the filing requirement. For example, these laws generally provide that a franchise advertisement in a “publication of general circulation” need not be filed with the state. This exemption requires that at least two-thirds of the circulation of the publication in which the advertisement will run has been outside of the state over the preceding twelve months.

A similar exemption is generally provided for radio or television programming that originates outside the state. For example, an advertisement on a radio program originating in New Jersey may be exempt from pre-filing in New York.

Website Advertising Exemption

One exemption from filing that all franchisors should be utilizing applies to their franchise websites. Each of the seven pre-filing states exempts a website advertising a franchise opportunity if, generally:

1. The URL of the website is disclosed on the cover page of the FDD filed with the state, or in a separate notice filed with the state regulator;
2. The website is not directed to any person in the state by or on behalf of the franchisor or anyone acting with the franchisor’s knowledge; and
3. No franchise is sold in the state until the offering is registered (or exempt from registration) and the FDD has been delivered to the prospective franchisee in compliance with the state’s law.

The precise conditions vary by state. California, for example, requires an additional notice filing that includes the website URL, and Rhode Island requires the franchisor to implement procedures designed to prevent direct follow-up communications with prospects in the state until the franchisor is registered. Franchisors should confirm each state’s requirements before relying on this exemption.

Advertisements Must Be Consistent with the FDD

It is commonplace for a franchise advertisement to include information disclosed to franchisee prospects in the franchisor’s FDD. For example, a website, brochures, or other sales material may advertise a franchisee’s estimated initial investment, the initial franchise fee, royalties and other ongoing fees, or a franchisee’s minimum exclusive territory. It is imperative that this information at all times be kept consistent with the franchisor’s current FDD.

With respect to financial performance representations, it is not enough that the representation be consistent with Item 19 of the FDD (though this is essential). It must also comply with the FTC Franchise Rule and related FTC Guidance. Among other things, a franchisor may make a financial performance representation in an advertisement only if it has a reasonable basis for the claim, the representation is included in  Item 19 of the FDD, and the representation is accompanied by prescribed disclosures.

Questions About Your Franchise Advertising?

Before your next franchise development campaign launches, have your advertising reviewed for compliance with the FTC Franchise Rule and applicable state franchise laws. The franchise attorneys at Fahey Schultz Burzych Rhodes PLC regularly review franchise sales advertising, manage state pre-filing, and counsel franchisors on FDD compliance. Contact our franchise team to discuss your advertising program.

This article is for general informational purposes only and does not constitute legal advice. Contact our office to discuss your specific situation.