March and April mean franchise registration renewal season for franchisors. Updating the franchise disclosure document (FDD) in a timely fashion is often a major challenge. COVID-19 has thrown much of the world, including franchisors, into a new, very uncertain reality. People and businesses are scrambling to respond and adapt. Yet, March and April remain the annual franchise registration renewal season with deadlines set by statute.
Thankfully, states are also scrambling to help franchisors with the upcoming deadlines. First to act is Maryland. The governor declared a state of emergency on March 5, 2020, and on March 17, the Maryland securities commissioner issued an order extending registrations and exemptions for currently registered or exempt franchisors whose registrations or exemptions would have expired during the state of emergency. The registration and exemption dates will be extended for 30 days after the governor of Maryland declares the end of the state of emergency.
The Maryland extension of the registration period is similar to the provisions in the California and New York franchise laws allowing registered franchisors to continue offering franchises while an amendment application is pending. During the extension period franchisors can provide prospective franchisees subject to the Maryland franchise law with their new FDD, even though it is not registered. The FDD must include the material updates that are required by the FTC Franchise Rule. The franchisor may not enter into an actual franchise agreement until the updated FDD has been registered or deemed exempt. The franchisor must also give the prospective franchisee at least 15 days after registration/exemption to review the FDD, together with a marked copy of the registered/exempted FDD against the FDD that the franchisee received earlier.
Franchisors should also note that the automatic effectiveness the Maryland Franchise Law provides for is also waived during the emergency period and should not be relied upon for the time being.
While we are hopeful that other states will follow suit, franchisors should not expect that all states will do so, or announce a change in time for this year’s filings. Most annual renewal deadlines are set by statute, and any change may involve the legislature or the state franchise commissioner’s discretion in amending the deadlines by order.
If a franchisor is unable to meet a registration renewal deadline, it can still file an application as a new franchise. There will be a slightly higher filing fee and it will have to avoid sales until the registration is approved.
Our Franchising & Distribution team of attorneys is continuing to monitor these developments and is available to answer your questions related to franchise matters affected by COVID-19.