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Franchise sales on the Internet. (IFA's 35th Annual Legal Symposium).

The Internet offers many exciting possibilities for franchisors, including on-line franchisee recruitment and franchise offering circular (UFOC) delivery. In addition to the franchisor's own web site, franchisee recruitment may involve Internet search engines, classified advertising in e-magazines, franchise broker web sites, and devices such as pop-up advertisements and email solicitation. The Internet also presents daunting legal challenges.

One issue is whether Internet advertising constitutes an illegal offer of a franchise in a state where the franchisor is not registered? All franchise registration states have exemptions which allow a franchisor, without first registering, to advertise for franchisees in a general publication having more than two-thirds of its paid circulation outside the state, but it is uncertain whether these exemptions apply to Internet advertising even though prospective franchisees can access the Internet from anywhere.

Unlike a traditional publication, Internet "circulation" figures are moving targets. It is hard to reliably record the residency of Internet visitors as they log on and, even if measurable, the percentage which reside in any given state is likely to vary from period to period. To address this ambiguity, NASAA, the North American Securities Administrators Association, adopted a model exemption which, when adopted by a state, exempts Internet offers from the state's franchise registration and disclosure requirements. To qualify, the advertisement may not be directed to anyone in that state (e.g. by e-mail), there must be a disclosure that it is not an offer to residents of that state, and the franchisor must register before selling a franchise in that state. To date, it has been adopted in nine states, California, Illinois, Indiana, Maryland, New York, North Dakota, Rhode Island, South Dakota and Washington.

A related issue is that several states require franchisors to submit franchisee advertising before publication. A number of state regulators have confirmed that this extends to Internet franchisee-recruitment advertising. But what must be filed? Is it just the parts of the web site expressly directed at prospective franchisees, or the entire web site, and if there are links to other web sites, must the linked material also be filed? Internet advertising tends to be changed more frequently than written advertising which also means that the franchisor may need to update these state filings continually.

NASAA adopted another model exemption to address this concern. Once adopted by a state, it exempts Internet advertising from the filing requirements provided the franchisor provides its URL to the state, among other requirements. To date, this exemption has been adopted only by New York and Illinois.

Eventually, the Internet will provide a convenient and cost effective method to distribute UFOCs. A 1996 FTC staff advisory opinion permits franchisors to deliver a UFOC by computer diskette if certain conditions are met, and an FTC staff opinion issued in 2000 allows for testing of Internet delivery through authorized "demonstration projects," like one offered by franchise.com. No state has yet authorized Internet disclosure.

Comprehensive changes to the FTC Rule are also pending which would authorize Internet disclosures. However, after the proposed Rule was published, the federal "E-Sign Act" was enacted, which will require the FTC to make substantial changes before the proposed Rule is finalized later this year or in early 2003, E-Sign essentially puts electronic contracts and disclosures on an equal footing with written documentation.

UETA, the Uniform Electronic Transactions Act, is a model state law version of E-Sign which has been adopted in some form in 40 states plus the District of Columbia and is pending in five other states. UETA and E-Sign co-exist and present numerous complex issues beyond the scope of this article. However, it is anticipated that the final revisions to the FTC Rule will conform to the requirements of these laws.

Arguably, E-Sign and UETA now permit franchisors to deliver disclosure documents electronically despite the lack of formal guidance from the FTC and state regulatory bodies, but the consensus among most franchise law practitioners is that it is premature to do so in light of the inherent regulatory uncertainties at this time. The best advice is to stay tuned for further developments.
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Author:Costello, Kenneth R.
Publication:Franchising World
Article Type:Brief Article
Geographic Code:1USA
Date:Jul 1, 2002
Words:678
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