State Franchise Registration Status and Franchise Laws
New York
Registration or Filing Required? Yes, Registration
Business Opportunity Laws? No
New York is a franchise registration state. So, you must register your FDD with the Investor Protection Bureau of the New York Attorney General prior to offering or selling franchises in the state. New York charges a $750 fee for the initial registration application and a $150 fee for renewal applications, which must be done annually within 120 days of the franchisor’s fiscal year end. More information can be found on the New York Attorney General’s Website.
What Qualifies as a Franchise in New York?
The New York Franchise Sales Act defines a franchise as an agreement in which a franchisee is granted the right to offer, sell or distribute goods or services under a marketing plan or system prescribed by a franchisor, and the franchisee is required to pay a franchise fee. The definition also includes agreements in which the franchisee pays a franchise fee and is granted the right to offer, sell or distribute goods or services associated with the franchisor’s trademark, service mark or other commercial symbol.
What Franchises Must Register in New York?
New York has the broadest jurisdictional reach of any registration state. Specifically, the Act states that it governs all franchise sale activity that takes place “in this state,” and this has been construed to include all offers or sales of franchises consummated in, emanating from, or directed to New York. Therefore, New York based franchisors should know that they will always be expected to register in New York, because any offer they make will be deemed to have “emanated” from New York. The location and residency of the franchisee is largely irrelevant, and there is no exemption for scenarios in which the franchisee and franchised business are both out of state. The law is so overarching that even a meeting between a Virginia franchisor and a potential Connecticut franchisee to discuss the sale of a franchise at a coffee shop in New York, would likely be considered franchise sale activity taking place in the state.
Additionally, franchisors that are not registered in New York must proceed with caution when advertising the sale of their franchises online, as those may constitute an illegal offer when viewed by a prospective franchisee in New York. However, the New York State Franchise Regulations state that a franchisor can avoid such a violation if the internet advertisement: (i) indicates that the franchise is not being offered to New York residents; (ii) is not directed to any person in New York by or on behalf of the franchisor or with the franchisor’s knowledge; and (iii) the franchisor registers their franchise in New York prior to selling any franchises there.
How Do I Register My Franchise in New York?
As of October 1, 2022, all applications in New York must be submitted through NASAA’s Electronic Filing Depository, and should include:
- A Uniform Franchise Registration Application with Certification form
- A Franchisor’s Costs and Source of Funds
- A Consent to Service of Process
- A Sales Agent Disclosure
- A Guarantee of Performance (if necessary)
- A Franchise Disclosure Document (two hard copies or one hard copy and one CD copy)
- The $750 initial application fee
As part of its FDD, franchisors must also submit audited financial statements – unaudited financial statements may be used on an interim basis. After submitting your application, the state must respond within 30 days either accepting the filing, or more likely, request adjustments or additional disclosures be made. This can cause the application process to take a significantly longer amount of time, so it is best to have everything as complete as possible when submitting the application.
How Do I Renew My Registration?
You didn’t ask “if” you needed to renew your registration…smart! You must renew your registration every year and must submit your renewal application within 120 days from the end of your fiscal year. If you do not submit your renewal application on time, you may have to file a new initial registration application.
For renewal applications, you must submit the Uniform Franchise Registration Application with Certification form, the Franchisor’s Costs and Source of Funds, one clean copy of your FDD and one redlined copy showing changes from the previous year, the $150 renewal fee, and a document with the following information:
- The name and address of each franchise sold, the date of the sale, and the name, address and telephone number of the person purchasing the franchise
- The price paid and credit terms for the sale of each franchise listed
- A copy of the franchisor’s annual audited financial statements
How Do I Make Amendments to My Registration?
Franchisors must “promptly” file amendments to their registrations after material changes are made. An amendment application must contain the Uniform Franchise Registration Application with Certification form, the Franchisor’s Costs and Source of Funds, one clean copy of your FDD and one redlined copy showing the changes, and the $150 amendment fee. The state provides some examples of what it considers to be material changes, including:
- The termination or non-renewal of 10 or 10% of the franchise locations during a 3-month period.
- The franchisor purchasing more than 5% of its franchises in a 6-month period.
- A change in franchise fees charged.
- Any significant adverse change to the business condition of the franchisor.
Does New York Have Financial Assurance Requirements?
As you may expect, New York does impose financial assurance requirements on franchisors that the state has determined do not have adequate financial arrangement to fulfill their obligations to franchisees. In these instances, the franchisor will be required to either escrow or impound its franchise fees until its obligations are fulfilled. Alternatively, the state may allow a franchisor to obtain a surety bond in lieu of escrow or impoundment.
Are There Any Exemptions to Registration?
New York also has registration exemptions that are a bit more complicated than those of other registration states. First, the Department of Law has the option to exempt franchisors who have a net worth of at least $5 million (or $1 million but are more than 80% owned by a company with a net worth of over $5 million) who file an application for exemption with the Department of Law and provide certain disclosures to prospective franchisees.
On the other hand, there are several instances in which franchisors are exempt, without it being at the discretion of the Department. Franchisors who have a net worth of more than $15 million (or $3 million but are more than 80% owned by a company with a net worth of over $15 million) are exempt from registration, provided they give prospective franchisees their principal business address and the name of their agent authorized to receive process. Sales to banks or other financial institutions are also exempt.
Franchisors are exempt from registration when offering a franchise to an existing franchisee, where the franchisee has operated a franchise for the prior 18 months, is purchasing the new franchise for its own operation, and the franchisor reports the sale to the Department of Law within 15 days of the sale. There is also a one-time isolated sale exemption to situations where the franchisor directs the offer to “no more than two persons” (i.e. there is no general advertising for franchisees in the state) for the purposes of establishing a franchise business. Finally, there is also a remote exemption where a franchisor is selling a franchise as an add-on to one of its already existing franchise business, an example of which may be a new product or service line.
How Else Does New York Regulate Franchising?
That wasn’t enough? You want more?? Oddly enough, New York has very few other rules restricting the franchise relationship. It obviously prohibits the use of fraud or deceit in the sale of a franchise, and also prohibits franchisors from requiring franchisees to enter into any kind of waiver or release of claims arising from rights under New York’s franchise laws.
Outside of that, franchisors must submit copies of their proposed advertisements to the Department of Law at least 7 days before using them. There is no fee for doing this, and the Department does not review them for accuracy or approval. They do require that each advertisement contain a statement saying:
“This advertisement is not an offering. An offering can only be made by a prospectus filed first with the Department of Law of the State of New York. Such filing does not constitute approval by the Department of Law.”
If your advertisement is a form of broadcast less than 30 seconds in length, you can replace the above disclosure with:
“This offering is made by prospectus only.”