683. Disclosure requirements. 1. It shall be unlawful and prohibited for any person to offer to sell or sell in this state any franchise unless and until there shall have been registered with the department of law, prior to such offer or sale, a written statement to be known as an "offering prospectus" concerning the contemplated offer or sale, which shall contain the information and representations set forth in and required by this section. Any uniform disclosure document approved for use by any agency of the federal government or sister state may be utilized and sought to be registered, provided that said uniform disclosure documents comply with the provisions of this article.
2. The offering prospectus sought to be registered with the department of law shall be filed with the department, accompanied by an application for registration on forms prescribed by the department, and shall contain the following:
(a) The name of the franchisor, the name under which the franchisor is doing or intends to do business, and the name of any parent or affiliated company that will engage in business transactions with franchisees.
(b) The franchisor's principal business address and the name and address of its agent in this state authorized to receive process.
(c) The business form of the franchisor, whether corporate, partnership, or otherwise.
(d) Such information concerning the identity and business experience of persons affiliated with the franchisor as the department of law may by rule prescribe.
(e) A statement as to whether the franchisor and its principals, officers, partners, directors, or any other person identified in the application for registration:
(1) Has been convicted of a felony, or pleaded nolo contendere to a felony charge, or held liable or enjoined in a civil action by a final judgment if such civil action involved fraud, embezzlement, fraudulent conversion or misappropriation of property.
(2) Is subject to any currently effective order of the United States securities and exchange commission or the securities administrator of any state denying the registration of or barring, revoking or suspending the registration of such person as a securities broker or dealer, or investment advisor, or securities agent or registered representative, or is subject to any currently effective order of any national securities association or national securities exchange, as defined in the Securities and Exchange Act of 1934, suspending or expelling such person from membership in such association or exchange.
(3) Is subject to a currently effective order or ruling of the federal trade commission.
(4) Is subject to any currently effective injunctive or restrictive order relating to business activity as a result of an action brought by a public agency or department, including, without limitation, actions affecting a license as a real estate broker or salesman.
Such statement shall set forth the court, date of conviction or judgment, any penalty imposed or damages assessed, or the date, nature and issuer of such order.
(f) The length of time the franchisor: (1) has conducted a business of the type to be operated by the franchisees, (2) has granted franchises for such business, and (3) has granted franchises in other lines of business.
(g) The most recent financial statement of the franchisor, together with a statement of any material changes in the financial condition of the franchisor from the date thereof. The department of law may by rule or order prescribe (1) the form and content of financial statements required under this article, (2) the circumstances under which consolidated financial statements shall be required, and (3) the circumstances under which financial statements shall be audited by independent certified public accountants.
(h) A statement of the franchise fee charged, the proposed application of the proceeds of such fee by the franchisor, and the formula by which the amount of the fee is determined if the fee is not uniform and the same in all cases.
(i) A statement describing any payments or fees other than franchise fees that the franchisee or subfranchisor is required to pay to the franchisor, including royalties and payments of fees which the franchisor collects in whole or in part on behalf of a third party or parties.
(j) A statement of the conditions under which the franchise agreement may be terminated or renewal refused or repurchased at the option of the franchisor.
(k) A statement as to whether, by the terms of the franchise agreement or by other device or practice, the franchisee or subfranchisor is required to purchase from the franchisor or his designee services, supplies, products, fixtures or other goods relating to the establishment or operation of the franchise business, together with a description and the terms and conditions thereof.
(l) A statement as to whether, by the terms of the franchise agreement or other device or practice, the franchisee is limited in the goods or services offered by him to his customers.
(m) A statement of the terms and conditions of any financing arrangements when offered directly or indirectly by the franchisor or his agent or affiliate.
(n) A statement of any past or present practice or of any intent of the franchisor to sell, assign, or discount to a third party any note, contract, or other obligation of the franchisee or subfranchisor in whole or in part.
(o) Any representation of estimated or projected franchisee earnings or income, together with a statement setting forth the data, methods and computations upon which such estimate or projection is based.
(p) A statement of any compensation or other benefit given or promised to a public figure arising, in whole or in part, from (1) the use of the public figure in the name or symbol of the franchise, or (2) the endorsement or recommendation of the franchise by the public figure in advertisements.
(q) A statement of the total number and location of franchises presently operating and proposed to be sold.
(r) A statement as to whether franchisees or subfranchisors receive an exclusive area or territory.
(s) A representation that the registered prospectus does not knowingly omit any material fact or contain any untrue statement of a material fact.
(t) Other information which the franchisor may desire to present.
(u) Other information or such additional disclosures related to the offer or sale of the franchise as the department of law may prescribe by rules or regulations promulgated under section six hundred ninety-four of this article as will afford prospective franchisees an adequate basis upon which to found their judgment.
(v) When the person filing the application for registration of an offering prospectus is a subfranchisor, the prospectus shall also include the same information concerning the subfranchisor as is required from the franchisor pursuant to this article.
3. Applications for registration of an offering prospectus shall be signed and verified by the franchisor or by the subfranchisor in the same manner provided in the civil practice law and rules for the verification of pleadings.
4. Every application by a franchisor for registration of an offering prospectus shall be accompanied by a copy of the typical franchise contract or agreement proposed for use or in use in this state, including all amendments, deletions, variations, and supplements thereto.
5. Every application by a franchisor for registration of an offering prospectus shall be accompanied by such materials, data, records, or other information as the department may by rule require in connection with its consideration of the application.
6. The offering prospectus shall recite in bold type of not less than twelve-point that registration does not constitute approval, recommendation, or endorsement by the department of law. The department may require that the applicant set forth in its prospectus potentially adverse information in designated positions and in a type size acceptable to the department.
7. Unless otherwise provided by regulation issued by the department, applications to register the offering prospectus required by subdivision one of this section shall be filed with the department of law at its office in the city of New York prior to the offering of the franchise involved. No offer, advertisement, or sale of such a franchise shall be made in or from the state of New York until the department has issued to the franchisor or other offeror a letter stating that the offering prospectus sought to be registered has been accepted for filing and filed. The department, not later than thirty days after such filing, shall issue such a letter or, in the alternative, a notification in writing indicating the respect in which the application for registration or the proposed offering prospectus itself is deficient or otherwise fails to make adequate disclosure. A refusal to register an offering prospectus, and notification thereof, shall be forthcoming if the department finds:
(a) That there has been a failure to comply with any of the provisions of this article or the rules of the department pertaining thereto.
(b) That the offer or sale of the franchise would constitute misrepresentation to, or deceit or fraud of, prospective franchisees.
(c) That the application for registration of the offering prospectus or the proposed offering prospectus itself is incomplete in any material respect or contains any statement which is, in light of the circumstances under which it was made, false or misleading with respect to any material fact.
(d) That the franchisor's method of business includes or would include activities which are illegal where performed.
(e) That a person identified in the application has been convicted of an offense described in subparagraph one of paragraph (e) of subdivision two of this section, is subject to an administrative order, or has had a civil judgment entered against him involving the illegal offering of franchises or securities, and the department determines that the involvement of the person in the sale or management of the franchise creates an unreasonable risk to prospective franchisees.
(f) That the franchise offering sought to be registered is the subject of a permanent or temporary injunction entered under any federal or state act applicable to the offering.
(g) That the franchisor has failed to pay the proper fee.
8. A franchise which is subject to registration under this article shall not be sold without first providing to the prospective franchisee, a copy of the offering prospectus, together with a copy of all proposed agreements relating to the sale of the franchise at the earlier of (a) the first personal meeting between the franchisor or its agent and the prospective franchisee, (b) at least ten business days prior to the execution of a binding franchise or other agreement, or (c) at least ten days prior to the receipt of any consideration in connection with the sale or proposed sale of a franchise. For the purposes of this chapter, the words: (i) "first personal meeting" shall mean the first face to face meeting between a franchisor or franchisor's agent or any representative or employee thereof and a prospective franchisee which is held for the purpose of discussing the sale or possible sale of a franchise; (ii) "other agreement" shall mean an agreement imposing a binding legal obligation on such prospective franchisee, about which the franchisor, franchise sales agent, or any agent, representative or employee thereof, knows or should know, in connection with the sale or proposed sale of a franchise; and, (iii) "receipt of any consideration" shall mean the payment by a prospective franchisee, about which the franchisor, franchise sales agent, or any agent, representative or employee thereof, knows or should know, of any consideration in connection with the sale or proposed sale of a franchise.
9. (a) A franchisor shall promptly notify the department in writing, by an application to amend the registered offering prospectus, of any material change in the information contained in the prospectus as originally submitted or amended. The department may further define by rule what is a material change for the purpose and circumstances under which an amendment of a registered prospectus shall be mandatory.
(b) An amendment to a registered offering prospectus filed after the effective date of the registration of the original offering prospectus, if the amendment is approved by the department, shall become effective on such date the department may determine, having due regard for the public interest and the protection of franchisees.
10. (a) Neither the fact that an application for registration of an offering prospectus under this article has been filed, nor the fact that such registration has become effective, constitutes a finding by the department that any document filed under this article, including the registered offering prospectus, is true, complete or not misleading. Neither any such fact nor the fact that an exemption is available for a transaction means that the department has passed in any way upon the merits or qualifications of, or recommended or given approval to, any person, franchise, or transaction.
(b) It is unlawful to make or cause to be made to any prospective purchaser or offeree a representation inconsistent with paragraph (a) of this subdivision.
11. No offer of a franchise shall be made except by the offering prospectus registered with the department of law pursuant to this section. Any advertisement in whatever form, including periodicals or on radio or television, shall contain a statement that no offer of such franchise is made except by such offering prospectus, and all such advertising shall be consistent with the representations and information required to be set forth in such prospectus as hereinbefore in this section provided.
12. In all literature employed in the offer and sale of a franchise and in all advertising in connection therewith, there shall be contained, in easily readable print on the face thereof, a statement that the filing of an application for registration of an offering prospectus or the acceptance and filing thereof by the department of law as required by this section does not constitute approval of the offering or the sale of such franchise by the department of law or the attorney general of this state.
13. A person shall not offer to sell or sell a franchise in this state on behalf of a franchisor or subfranchisor, except in transactions exempted under this article, unless the franchisor or subfranchisor and the person file a franchise agent's application with the department of law on the form prescribed by the department, and the department issues an order of registration for such person. The department may prescribe rules relating to the qualifications, conduct, and denial, suspension, or revocation or registrations of franchise sales agents.
14. (a) Every franchisor or subfranchisor offering franchises for sale in this state shall keep and maintain a complete set of books and records and shall keep and maintain accounts of franchise sales in accordance with generally accepted accounting principles, and shall make and file with the department such reports as the department may by rule prescribe, including an annual report setting forth the franchises sold by it and the proceeds derived therefrom, and shall furnish to the department such materials relating to the offer or sale of the franchise as it may by rule require. All such records are subject at any time to reasonable periodic, special, or other examinations by a representative of the department, within or without this state, as the department deems necessary or appropriate in the public interest or for the protection of investors.
(b) The department may consider the opinions, appraisals, and reports of engineers, appraisers, or other experts which may be presented by an applicant or any interested party, on any question of fact concerning or affecting the franchises proposed to be offered and sold. In lieu of, or in addition to, such opinions, appraisals, and reports, the department may have any or all matters concerning or affecting such franchises investigated, appraised, passed upon, and certified to it by engineers, appraisers, or other experts selected by it. The experts' cost of travel and lodging relating to such investigation, and the costs of experts' fees, shall be borne by the applicant and shall be paid before effectiveness of its registration, provided that the applicant shall have agreed in writing with the department to bear such costs and fees, or shall have had the opportunity to establish that no good cause exists for such investigation or expenditure, or shall have himself furnished the desired information to the department.
(c) If information that the department deems necessary relating to the franchise is requested by the department and is not furnished by the applicant, or the department deems information submitted to be unreliable or substantially incomplete, the department may investigate any or all matters concerning or affecting such franchise. The costs of all travel and lodging expenses relating to investigations outside of this state shall be borne by the applicant and shall be paid before effectiveness of its registration.
15. The department may by rule require the filing and approval prior to use of any pamphlet, circular, form letter, advertisement, or other sales literature or advertising communication addressed to or intended for distribution to prospective franchisees.
Last modified: February 3, 2019