Title of Regulation: 21VAC5-110. Retail Franchising Act Rules (amending 21VAC5-110-55).

Statutory Authority: §§ 12.1-13 and 13.1-572 of the Code of Virginia.

Public Hearing Information: A public hearing will be held upon request.

Public Comment Deadline: December 9, 2019.

Agency Contact: Timothy O'Brien, Manager, Securities and Retail Franchising, State Corporation Commission, Tyler Building, 9th Floor, P.O. Box 1197, Richmond, VA 23218, telephone (804) 371-9415, FAX (804) 371-9911, or email timothy.o'brien@scc.virginia.gov.

Summary:

The proposed amendment requires franchisors to include with the franchise disclosure document three "state cover sheets" and a "state effective dates page" in accordance with the requirements of Part III B of the 2008 Franchise Registration and Disclosure Guidelines, as adopted in 2019, by the North American Securities Administrators Association, Inc.

AT RICHMOND, NOVEMBER 1, 2019

COMMONWEALTH OF VIRGINIA, ex rel.

STATE CORPORATION COMMISSION

CASE NO. SEC-2019-00052

Ex Parte: In the matter of
Adopting a Revision to the Rules
Governing the Virginia Retail Franchising Act

ORDER TO TAKE NOTICE

Section 12.1-13 of the Code of Virginia ("Code") provides that the State Corporation Commission ("Commission") shall have the power to promulgate rules and regulations in the enforcement and administration of all laws within its jurisdiction. Section 13.1-572 of the Virginia Retail Franchising Act ("Act"), §§ 13.1-557 et seq. of the Code provides that the Commission may issue any rules and regulations necessary or appropriate for the administration and enforcement of the Act. The Retail Franchising Act Rules are set forth in Chapter 110 of Title 21 of the Virginia Administrative Code, 21 VAC 5-110-10 et seq. ("Rules").¹

Proposed Revision to Section 55 of Chapter 110 regarding the Requirements for the Franchise Disclosure Document.

Section 55 of Chapter 110 of the Rules sets forth the requirements for the content and format of a franchisor's Franchise Disclosure Document ("FDD"). Currently under this section, a franchisor's FDD must include one (1) state cover page immediately following the Federal Trade Commission ("FTC") required cover page and 21 VAC 5-110-55 (C) sets forth the content requirements for such a state cover page.

The proposed amendment to 21 VAC 5-110-55 (C) requires franchisors to include with the FDD three "State Cover Sheets" and a "State Effective Dates Page" in accordance with the requirements of Part III B of the North American Securities Administrators Association, Inc. ("NASAA") 2008 Franchise Registration and Disclosure Guidelines, as adopted in 2019. A copy of the new NASAA State Cover Sheets and State Effective Dates Page requirements, including instructions to franchisors, a sample State Cover Sheet, and a sample State Effective Dates Page, is attached hereto as Exhibit A. A copy of the proposed revised Section 55 of Chapter 110 of the Rules is attached hereto as Exhibit B.

The new three State Cover Sheets requirement includes a page about how to use the FDD, a separate page with general cautionary information about franchising, and a third page to disclose risk factors specific to the franchise being offered. The new State Effective Dates Page is a separate document that includes the date when a franchise registration is made effective in Virginia.²

The Division recommended to the Commission that the proposed revisions should be considered for adoption, with an effective date of January 3, 2020. The Division also has recommended to the Commission that a hearing should be held only if requested by those interested parties who specifically indicate that a hearing is necessary and the reasons therefore.

A copy of the proposed revisions may be requested by interested parties from the Division by telephone, by mail or e-mail request and also can be found at the Division's website: http://www.scc.virginia.gov/srf/index.aspx. Any comments on the proposed rules must be received by December 9, 2019.

IT IS THEREFORE ORDERED that:

(1) The proposed revisions are appended hereto and made a part of the record herein.

(2) Comments or request for hearing on the proposed revisions must be submitted in writing to Joel H. Peck, Clerk of the Commission, c/o Document Control Center, P.O. Box 2118, Richmond, Virginia 23218, on or before December 9, 2019. Requests for hearing shall state why a hearing is necessary and why the issues cannot be adequately addressed in written comments. All correspondence shall reference Case No. SEC-2019-00052. Interested persons desiring to submit comments electronically may do so by following the instructions available at the Commission's website: http://www.scc.virginia.gov/case.

(3) The proposed revisions shall be posted on the Commission's website at http://www.scc.virginia.gov/case and on the Division's website at http://www.scc.virginia.gov/srf/index.aspx. Interested persons may also request a copy of the proposed revisions from the Division by telephone, mail or e-mail.

AN ATTESTED COPY hereof, together with a copy of the proposed revisions, shall be provided to the Registrar of Regulations for appropriate publication in the Virginia Register of Regulations.

AN ATTESTED COPY hereof shall be sent to the Director of the Division of Securities and Retail Franchising, who shall forthwith provide notice of this Order via U.S. mail or e-mail a copy of this Order to any interested persons as he may designate.

____________________________________

¹A copy of the Rules may be found at the Commission's website (www.scc.virginia.gov/srf/lawsregs.aspx).

²Under the current rule, such information is included in the one (1) state cover page.

21VAC5-110-55. The Franchise Disclosure Document.

A. Format. The Franchise Disclosure Document must be prepared in accordance with §§ 436.3-436.5 of the Federal Trade Commission Franchise Rule (16 CFR 436.3-436.5), subject to the modifications set forth in subsections B and C of this section.

B. Financial statements. Notwithstanding § 436.5(u)(2) of the Federal Trade Commission Franchise Rule (16 CFR 436.5), a start-up franchisor in its first partial or full fiscal year selling franchises shall provide an opening balance sheet that has been audited by an independent certified public accountant using generally accepted United States auditing standards.

C. State cover page sheets and effective dates page. The Franchise Disclosure Document shall include the following state cover page prepared in accordance with this subsection, which must immediately follow the Federal Trade Commission required cover page:

1. State the following legend:

STATE COVER PAGE

Your state may have a franchise law that requires a franchisor to register or file with a state franchise administrator before offering or selling in your state. REGISTRATION OF A FRANCHISE BY A STATE DOES NOT MEAN THAT THE STATE RECOMMENDS THE FRANCHISE OR HAS VERIFIED THE INFORMATION IN THIS DISCLOSURE DOCUMENT.

Call the state franchise administrator listed in Exhibit __ for information about the franchisor or about franchising in your state.

2. State the following:

MANY FRANCHISE AGREEMENTS DO NOT ALLOW YOU TO RENEW UNCONDITIONALLY AFTER THE INITIAL TERM EXPIRES. YOU MAY HAVE TO SIGN A NEW AGREEMENT WITH DIFFERENT TERMS AND CONDITIONS IN ORDER TO CONTINUE TO OPERATE YOUR BUSINESS. BEFORE YOU BUY, CONSIDER WHAT RIGHTS YOU HAVE TO RENEW YOUR FRANCHISE, IF ANY, AND WHAT TERMS YOU MIGHT HAVE TO ACCEPT IN ORDER TO RENEW.

3. If any of the following apply, state the following, using capital letters as shown:

Please consider the following RISK FACTORS before you buy this franchise:

THE FRANCHISE AGREEMENT REQUIRES YOU TO RESOLVE DISPUTES WITH US BY [LITIGATION/ARBITRATION/MEDIATION] ONLY IN [STATE]. OUT-OF-STATE [LITIGATION/ARBITRATION/MEDIATION] MAY FORCE YOU TO ACCEPT A LESS FAVORABLE SETTLEMENT FOR DISPUTES. IT MAY ALSO COST YOU MORE TO [LITIGATE/ARBITRATE/MEDIATE] WITH US IN [STATE] THAN IN YOUR OWN STATE.

THE FRANCHISE AGREEMENT STATES THAT [STATE] LAW GOVERNS THE AGREEMENT, AND THIS LAW MAY NOT PROVIDE THE SAME PROTECTIONS AND BENEFITS AS LOCAL LAW. YOU MAY WANT TO COMPARE THESE LAWS.

4. In addition to the above, disclose other risk factors required by the state administrator.

5. If one or more risk factors applies, also state:

THERE MAY BE OTHER RISKS CONCERNING THIS FRANCHISE.

6. If you use the services of a franchise broker or referral source, state the following:

We use the services of one or more FRANCHISE BROKERS or referral sources to assist us in selling our franchise. A franchise broker or referral source represents us, not you. We pay this person a fee for selling our franchise or referring you to us. You should be sure to do your own investigation of the franchise.

7. State the following:

Effective Date:

a. Leave the effective date blank until notified of effectiveness by the state administrator.

b. If an applicant is using a multistate disclosure document, the applicant may list multiple state effective dates together on a separate page that is to be inserted immediately following the state cover page.  state cover sheets and state effective dates page prepared in accordance with the requirements set forth in Part III B of the 2008 Franchise Registration and Disclosure Guidelines, as adopted May 19, 2019, by the North American Securities Administrators Association, Inc.

DOCUMENTS INCORPORATED BY REFERENCE (21VAC5-110)

2008 Franchise Registration and Disclosure Guidelines, adopted May 19, 2019, North American Securities Administrators Association, Inc.