Franchising in 2012- FTC Modifies Three Franchise Rule Exemptions to Reflect Consumer Price Index Adjustments

Posted by Joshua Becker on Jun 13, 2012 in Blog | 5 comments

The Federal Trade Commission announced today  it is amending the July 1, 2008 Franchise Rule to increase the monetary thresholds used to determine when the sale of a franchise business is exempt from the disclosure obligations outlined in the Franchise Rule.  The monetary threshold amendment to the Franchise Rule  was based on the Franchise Rule’s requirement that the FTC adjust the thresholds every four years based on the Consumer Price Index.

The 2008 amendments to the Rule provide three exemptions based on a monetary threshold. The CPI adjustments, which will take effect July 1, 2012, will exempt:

• Sales where the buyer’s initial payment is less that $540 (currently $500).
• Sales where the initial investment is at least $1,084,900 (now $1 million), excluding the cost of unimproved land and any franchisor (or affiliate) financing; and
• Sales to large entities, such as airports, hospitals, and universities that have been in business for at least five years and have a net worth of at least $5,424,500 (now $5 million)

The CPI adjustments to the rule will have little practical impact on most franchise transactions although the increase to the Large Transaction exemption is a material increase to the net worth requirement.  Franchisors contemplating exempt transactions after July 1, 2012 should confirm that the transaction meets the modified minimum investment/net worth requirements.