A. 4880 2
S 681. Definitions. 1. "Advertisement" includes any [written or print-
ed communication, or any communication by means of recorded telephone
messages or spoken on radio, television, or similar communications
media, published in connection with an offer or sale of a franchise]
PRINTED, BROADCAST OR ELECTRONICALLY DISSEMINATED MASS OR MULTIPLE
COMMUNICATION OF ANY TYPE OR NATURE INTENDED TO ADVERTISE OR PROMOTE A
FRANCHISE OFFERING TO PROSPECTIVE FRANCHISEES, WHETHER COMMUNICATED IN
BROADCAST MEDIA, OVER THE INTERNET, IN PRINTED MEDIA, BY EMAIL OR OTHER
ELECTRONIC COMMUNICATIONS OR OTHERWISE.
2. "Department" means the department of law.
3. "FRACTIONAL FRANCHISE" MEANS A FRANCHISE RELATIONSHIP THAT SATIS-
FIES THE FOLLOWING CRITERIA WHEN THE RELATIONSHIP IS CREATED:
(A) THE FRANCHISEE, ANY OF THE FRANCHISEE'S CURRENT DIRECTORS OR OFFI-
CERS, OR ANY CURRENT DIRECTORS OR OFFICERS OF A PARENT OR AFFILIATE, HAS
MORE THAN TWO YEARS OF EXPERIENCE IN THE SAME TYPE OF BUSINESS; AND
(B) THE PARTIES HAVE A REASONABLE BASIS TO ANTICIPATE THAT THE SALES
ARISING FROM THE RELATIONSHIP WILL NOT EXCEED TWENTY PERCENT OF THE
FRANCHISEE'S TOTAL DOLLAR VOLUME IN SALES DURING THE FIRST YEAR OF OPER-
ATION.
4. (A) "Franchise" means a contract or agreement, either expressed or
implied, whether oral or written, between two or more persons by which:
[(a) A franchisee is granted the right to engage in the business of
offering, selling, or distributing goods or services under a marketing
plan or system prescribed in substantial part by a franchisor, and the
franchisee is required to pay, directly or indirectly, a franchise fee,
or
(b) A franchisee is granted the right to engage in the business of
offering, selling, or distributing goods or services substantially asso-
ciated with the franchisor's trademark, service mark, trade name, logo-
type, advertising, or other commercial symbol designating the franchisor
or its affiliate, and the franchisee is required to pay, directly or
indirectly, a franchise fee.
A franchise under this article shall not include any agreement,
contract, or franchise subject to the provisions of article eleven-B of
this chapter or section one hundred ninety-nine of this chapter, or any
agreement or contract for the sale of motor fuel.
4. A] (I) A FRANCHISEE IS GRANTED THE RIGHT TO ENGAGE IN THE BUSINESS
OF OFFERING, SELLING, OR DISTRIBUTING GOODS OR SERVICES UNDER A MARKET-
ING PLAN OR SYSTEM PRESCRIBED IN SUBSTANTIAL PART BY A FRANCHISOR;
(II) THE OPERATION OF THE FRANCHISEE'S BUSINESS PURSUANT TO SUCH PLAN
OR SYSTEM IS SUBSTANTIALLY ASSOCIATED WITH THE FRANCHISOR'S TRADEMARK,
SERVICE MARK, TRADE NAME, LOGOTYPE, ADVERTISING OR OTHER COMMERCIAL
SYMBOL DESIGNATING THE FRANCHISOR OR ITS AFFILIATE; AND
(III) AS A CONDITION OF OBTAINING OR COMMENCING OPERATION OF THE FRAN-
CHISE, THE FRANCHISEE MAKES A REQUIRED PAYMENT OR COMMITS TO MAKE A
REQUIRED PAYMENT TO THE FRANCHISOR OR ITS AFFILIATE.
(B) NONE OF THE FOLLOWING CONSTITUTES A "REQUIRED PAYMENT" FOR
PURPOSES OF ITEM (III) OF PARAGRAPH (A) OF THIS SUBDIVISION:
(I) THE PURCHASE OR AGREEMENT TO PURCHASE GOODS AT A BONA FIDE WHOLE-
SALE PRICE;
(II) THE PAYMENT OF A REASONABLE SERVICE CHARGE TO THE ISSUER OF A
CREDIT CARD BY AN ESTABLISHMENT ACCEPTING OR HONORING SUCH CREDIT CARD;
(III) AMOUNTS PAID TO A TRADING STAMP COMPANY BY A PERSON ISSUING
TRADING STAMPS IN CONNECTION WITH THE RETAIL SALE OF MERCHANDISE OR
SERVICES;
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(IV) THE PURCHASE OR LEASE, AT FAIR MARKET VALUE, OF REAL PROPERTY OR
AGREEMENT TO SO PURCHASE OR LEASE REAL PROPERTY NECESSARY TO ENTER INTO
THE BUSINESS OR TO CONTINUE THE BUSINESS UNDER THE FRANCHISE AGREEMENT;
OR
(V) THE PURCHASE OF SALES DEMONSTRATION EQUIPMENT AND MATERIALS
FURNISHED AT COST FOR USE IN MAKING SALES AND NOT FOR RESALE.
5. A "franchisee" [is] MEANS a person to whom a franchise is granted.
[5. A "franchisor" is]
6. "FRANCHISE SELLER" MEANS A PERSON WHO OFFERS FOR SALE, SELLS, OR
ARRANGES FOR THE SALE OF A FRANCHISE. IT INCLUDES THE FRANCHISOR AND THE
FRANCHISOR'S EMPLOYEES, REPRESENTATIVES, AGENTS, SUBFRANCHISORS, AND
THIRD-PARTY BROKERS WHO ARE INVOLVED IN FRANCHISE SALES ACTIVITIES. IT
DOES NOT INCLUDE EXISTING FRANCHISEES WHO SELL ONLY THEIR OWN OUTLET AND
WHO ARE OTHERWISE NOT ENGAGED IN FRANCHISE SALES ON BEHALF OF THE FRAN-
CHISOR.
7. "FRANCHISOR" MEANS a person who grants a franchise AS THE PARTY TO
A CONTRACT WITH A FRANCHISEE. UNLESS OTHERWISE STATED, IT INCLUDES
SUBFRANCHISORS.
[6. "Area franchise" means a contract or agreement between a franchi-
sor and a subfranchisor whereby the subfranchisor is granted the right,
for consideration given in whole or in part for such right, to sell or
negotiate the sale of franchises in the name or on behalf of the fran-
chisor; unless specifically stated otherwise, "franchise" includes "area
franchise".
7. "Franchise fee" means any fee or charge that a franchisee or
subfranchisor is required to pay or agrees to pay directly or indirectly
for the right to enter into a business under a franchise agreement or
otherwise sell, resell or distribute goods, services, or franchises
under such an agreement, including, but not limited to, any such payment
for goods or services. The following are not the payment of a franchise
fee:
(a) The purchase or agreement to purchase goods at a bona fide whole-
sale price;
(b) The payment of a reasonable service charge to the issuer of a
credit card by an establishment accepting or honoring such credit card;
(c) Amounts paid to a trading stamp company by a person issuing trad-
ing stamps in connection with the retail sale of merchandise or
services;
(d) The purchase or lease, at fair market value, of real property or
agreement to so purchase or lease real property necessary to enter into
the business or to continue the business under the franchise agreement;
(e) The payment of a fee which on an annual basis does not exceed five
hundred dollars where the payor receives sales materials of an equiv-
alent or greater value than his payment;
(f) The purchase of sales demonstration equipment and materials
furnished at cost for use in making sales and not for resale;
(g) A lease, license or other agreement by a retailer permitting the
lessee, licensee or beneficiary to offer, sell or distribute goods or
services on or about the premises occupied by said retailer.
8. "Franchise sales agent" means a person who directly or indirectly
engages in the offer or sale of any franchise on behalf of another.
Franchisors, subfranchisors, and their employees are not to be consid-
ered franchise sales agents.
9. "Franchise salesman" means each and every person employed by a
franchisor or franchise sales agent for the purpose of representing such
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franchisor or franchise sales agent in the offer or sale of any fran-
chise.
10.] 8. "Fraud," "fraudulent practice," and "deceit" are not limited
to common law fraud or deceit, and include:
(a) Any deception, concealment, suppression, device, scheme or arti-
fice employed by a [franchisor, franchise sales agent, subfranchisor or
franchise salesman] FRANCHISE SELLER to obtain any money, promissory
note, commitment or property by any false or visionary pretense, repre-
sentation or promise;
(b) Any material misrepresentation in any registered [prospectus]
DISCLOSURE DOCUMENT filed under this article; or
(c) The omission of any material fact in any registered [prospectus]
DISCLOSURE DOCUMENT filed under this article.
[11.] 9. "Offer" or "offer to sell" includes any attempt to offer to
dispose of, or solicitation of an offer to buy, a franchise or interest
in a franchise for value. The terms "offer" and "offer to sell" do not
include the renewal or extension of an existing franchise where there is
no interruption in the operation of the franchised business by the fran-
chisee.
[12.] 10. (a) An offer or sale of a franchise is made in this state
when an offer to sell is made in this state, or an offer to buy is
accepted in this state, or, if the franchisee is domiciled in this
state, the franchised business is or will be operated in this state.
(b) An offer to sell is made in this state when the offer either orig-
inated from this state or is directed by the offeror to this state and
received at the place to which it is directed. An offer to sell is
accepted in this state when acceptance is communicated to the offeror
from this state.
(c) An offer to sell is not made in this state merely because a
publisher circulates or there is circulated on his behalf in this state
a bona fide newspaper or other publication of general, regular and paid
circulation which has had more than two-thirds of its circulation
outside this state during the past twelve months, or a radio or tele-
vision program originating outside this state is received in this state.
[13.] 11. "Person" means an individual, corporation, LIMITED LIABILITY
COMPANY, LIMITED OR GENERAL partnership, joint venture, association,
company, trust, unincorporated organization or other entity and shall
include any other person that has a substantial interest in or effec-
tively controls such person, as well as the individual officers, direc-
tors, general partners, MANAGING PARTNERS, LIMITED LIABILITY COMPANY
MANAGERS OR MANAGING MEMBERS, trustees or other individuals in control
of the activities of each such person.
12. "PROSPECTIVE FRANCHISEE" MEANS ANY PERSON (INCLUDING ANY AGENT,
REPRESENTATIVE OR EMPLOYEE)_ WHO APPROACHES OR IS APPROACHED BY A FRAN-
CHISE SELLER TO DISCUSS THE POSSIBLE ESTABLISHMENT OF A FRANCHISE
RELATIONSHIP.
[14.] 13. "Publish" means publicly to issue [or], circulate OR DISSEM-
INATE by newspaper, mail, radio [or], television, ELECTRONIC COMMUNI-
CATIONS (INCLUDING THOSE ACHIEVED THROUGH THE INTERNET, ELECTRONIC MAIL
AND OTHER FORMS OF ELECTRONIC OR COMPUTER COMMUNICATIONS) or otherwise
[to disseminate to the public].
[15.] 14. "Sale" or "sell" includes every contract or agreement of
sale, contract to sell, or disposition of, a franchise or interest in a
franchise for value. "SALE" OR "SELL" DOES NOT INCLUDE THE TRANSFER,
SALE OR ASSIGNMENT OF A FRANCHISE BY AN EXISTING FRANCHISEE WHERE THE
FRANCHISOR HAD NO SIGNIFICANT INVOLVEMENT IN ARRANGING FOR OR EFFECTUAT-
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ING THE FRANCHISEE'S SALE, TRANSFER OR ASSIGNMENT OF ITS FRANCHISE. A
FRANCHISOR'S APPROVAL OR DISAPPROVAL OF A FRANCHISEE SALE, TRANSFER OR
ASSIGNMENT ALONE IS NOT DEEMED TO BE SIGNIFICANT INVOLVEMENT. A
FRANCHISOR'S ENTERING INTO OF A SUBSTITUTE FRANCHISE AGREEMENT WITH A
FRANCHISE PURCHASER, TRANSFEREE OR ASSIGNEE IS NOT DEEMED TO BE SIGNIF-
ICANT INVOLVEMENT IF SUCH SUBSTITUTE AGREEMENT CONTAINS TERMS AND CONDI-
TIONS THAT DO NOT DIFFER MATERIALLY FROM THE ORIGINAL FRANCHISE AGREE-
MENT.
[16.] 15. "State" means any state, territory, or possession of the
United States, INCLUDING the District of Columbia and Puerto Rico.
[17.] 16. "Subfranchisor" means a franchisee [who has the right to
sell or subdivide his franchise to another or others, known as "subfran-
chisees," while having and retaining all or part of the franchisor's
interest or rights under franchise agreements with such subfranchisee.
Under this article and in this situation, the subfranchisee shall be
considered the franchisee, and both the principal franchisor and the
subfranchisor shall be considered the franchisor] WHOSE FRANCHISE
INCLUDES THE RIGHT TO GRANT FRANCHISES TO OTHER PERSONS, MEANING TO
OFFER AND ENTER INTO AGREEMENTS WITH OTHER PERSONS GRANTING FRANCHISE
RIGHTS TO SUCH OTHER PERSONS (KNOWN AS "SUBFRANCHISEES"). UNDER THIS
ARTICLE, BOTH THE PRINCIPAL FRANCHISOR AND THE SUBFRANCHISOR SHALL BE
CONSIDERED THE "FRANCHISOR" IN INSTANCES IN WHICH BOTH ARE INVOLVED IN
OFFERING AND SELLING THE SUBJECT FRANCHISE AND BOTH FULFILL POST-SALE
OBLIGATIONS TO THE SUBJECT SUBFRANCHISEE. UNDER THIS ARTICLE, ONLY THE
SUBFRANCHISOR SHALL BE CONSIDERED THE "FRANCHISOR", TO THE EXCLUSION OF
THE PRINCIPAL FRANCHISOR, IF IT IS THE SUBFRANCHISOR ALONE WHICH OFFERS
AND SELLS FRANCHISES TO SUBFRANCHISEES AND IS ENTIRELY RESPONSIBLE FOR
FULFILLING ALL CONTRACTUAL DUTIES AND OBLIGATIONS TO SUCH FRANCHISEES.
UNDER THIS ARTICLE, A SUBFRANCHISEE SHALL BE CONSIDERED A "FRANCHISEE".
[18.] 17. In any proceeding under this article, the burden of proving
an exemption or an exception from a definition is upon the person claim-
ing it.
S 3. Section 682 of the general business law, as added by chapter 730
of the laws of 1980, is amended to read as follows:
S 682. Scope. The disclosure requirements mandated by this article
apply to all [written or oral arrangements between a franchisor and
franchisee in connection with the offer or sale of a franchise, includ-
ing, but not limited to, the franchise offering, the franchise agree-
ment, sales of goods or services, leases and mortgages of real or
personal property, promises to pay, security interests, pledges, insur-
ance, advertising, construction or installation contracts, servicing
contracts, and all other arrangements in which the franchisor or
subfranchisor has an interest] OFFERS AND SALES OF FRANCHISES MADE IN
THIS STATE, EXCEPT FOR THOSE OFFERS AND SALES THAT ARE SPECIFICALLY
EXEMPTED OR EXCLUDED BY THIS ARTICLE.
S 4. Section 683 of the general business law, as added by chapter 730
of the laws of 1980, subdivision 8 as amended by chapter 193 of the laws
of 1982, is amended to read as follows:
S 683. [Disclosure] REGISTRATION AND 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"] FRANCHISE
DISCLOSURE DOCUMENT concerning the contemplated offer or sale, which
shall contain the information and representations set forth in and
required by this [section] ARTICLE AND THE REGULATIONS PROMULGATED UNDER
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THIS ARTICLE, EXCEPT AS OTHERWISE PROVIDED UNDER SECTION SIX HUNDRED
EIGHTY-FOUR OF THIS ARTICLE. 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 disclo-
sure documents comply with the provisions of this article.
2. [The offering prospectus sought to be registered with the depart-
ment of law shall be filed with the department, accompanied by an appli-
cation 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 affil-
iated company that will engage in business transactions with franchi-
sees.
(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, partner-
ship, 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, offi-
cers, partners, directors, or any other person identified in the appli-
cation 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 Securi-
ties 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 judg-
ment, 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 consol-
idated financial statements shall be required, and (3) the circumstances
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under which financial statements shall be audited by independent certi-
fied 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 franchi-
sor 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 establish-
ment 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 arrange-
ments 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 pres-
ently 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
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same manner provided in the civil practice law and rules for the verifi-
cation 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, includ-
ing all amendments, deletions, variations, and supplements thereto.
5. Every application by a franchisor for registration of an offering
prospectus shall be accompanied by] THE DEPARTMENT WILL NOT REGISTER A
FRANCHISE DISCLOSURE DOCUMENT SUBMITTED TO THE DEPARTMENT WITH AN APPLI-
CATION FOR REGISTRATION UNLESS THE FRANCHISE DISCLOSURE DOCUMENT
CONTAINS SUCH DISCLOSURES AS THE DEPARTMENT MAY BY RULE OR REGULATION
REQUIRE, TOGETHER WITH such materials, data, records, [or] AND other
information as the department may by rule OR REGULATION require [in
connection with its consideration of the application].
[6.] 3. The [offering prospectus] FRANCHISE DISCLOSURE DOCUMENT shall
recite [in bold type of not less than twelve-point] that registration
does not [constitute approval, recommendation, or endorsement by] MEAN
THAT the department [of law] RECOMMENDS THE FRANCHISE OR HAS VERIFIED
THE INFORMATION IN THE DISCLOSURE DOCUMENT. The department may require
that the applicant set forth in its [prospectus] FRANCHISE DISCLOSURE
DOCUMENT potentially adverse information [in]. THE DEPARTMENT MAY SPECI-
FY designated positions and [in a] type [size] SIZES acceptable to the
department FOR THE DISCLOSURE REQUIRED BY THIS SUBDIVISION.
[7.] 4. Unless otherwise provided by regulation issued by the depart-
ment, applications to register the [offering prospectus] FRANCHISE
DISCLOSURE DOCUMENT 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, advertise-
ment, or sale of [such] a franchise DESCRIBED IN THE FRANCHISE DISCLO-
SURE DOCUMENT 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] FRANCHISE DISCLOSURE DOCUMENT
sought to be registered has been [accepted for filing and filed] REGIS-
TERED. 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] FRANCHISE DISCLOSURE DOCUMENT
itself is deficient or otherwise fails to make adequate disclosure. [A
refusal to register an offering prospectus, and notification thereof,
shall be forthcoming] THE DEPARTMENT SHALL DENY REGISTRATION OF A FRAN-
CHISE DISCLOSURE DOCUMENT AND SHALL NOTIFY THE APPLICANT OF SUCH DENIAL
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 misrepre-
sentation to, or deceit or fraud of, prospective franchisees.
(c) That the application for registration of the [offering prospectus
or the] proposed [offering prospectus] FRANCHISE DISCLOSURE DOCUMENT
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 WHO has been convicted
of an offense [described in subparagraph one of paragraph (e) of subdi-
vision two of this section,] is subject to an administrative order, or
A. 4880 9
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 REQUIRED BY
THE DEPARTMENT.
[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 represen-
tative 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, fran-
chise 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.]
5. TO ENHANCE THE UNIFORM AND EFFICIENT ADMINISTRATION AND THE EFFEC-
TIVE ENFORCEMENT OF THIS ARTICLE, IT IS THE INTENT OF THE LEGISLATURE
THAT THE DEPARTMENT MAINTAIN A RISK-BASED PROCESS OF REVIEWING APPLICA-
TIONS FOR REGISTRATION OF FRANCHISE DISCLOSURE DOCUMENTS. UNDER THE
RISK-BASED REVIEW PROCESS, THE DEPARTMENT SHALL FOCUS ON REVIEWING
APPLICATION INFORMATION POSING SIGNIFICANT RISK TO PROSPECTIVE FRANCHI-
SEES, WITH EMPHASIS ON RISKS ASSOCIATED WITH THE FRANCHISOR'S FINANCIAL
CONDITION, THE FRANCHISOR'S COMPLIANCE RECORD, AND SIGNIFICANT DEFICIEN-
CIES WITH THE FRANCHISOR'S APPLICATION. WHEN REVIEWING FRANCHISE REGIS-
TRATION APPLICATIONS UNDER THIS ARTICLE, THE DEPARTMENT SHALL CONCEN-
TRATE ON HELPING TO PREVENT MISAPPROPRIATION, MISMANAGEMENT, AND
MISREPRESENTATION IN CONNECTION WITH THE OFFER OR SALE OF ANY FRANCHISE
SUBJECT TO THIS ARTICLE.
6. (A) A FRANCHISOR MAY NOT SELL A FRANCHISE SUBJECT TO REGISTRATION
IN THIS STATE WITHOUT DELIVERING TO THE PROSPECTIVE FRANCHISEE A COPY OF
THE FRANCHISOR'S CURRENTLY REGISTERED FRANCHISE DISCLOSURE DOCUMENT AT
THE EARLIER OF: (I) FOURTEEN CALENDAR DAYS BEFORE THE PROSPECTIVE FRAN-
CHISEE SIGNS A BINDING AGREEMENT WITH THE FRANCHISOR, OR (II) FOURTEEN
CALENDAR DAYS BEFORE THE PROSPECTIVE FRANCHISEE PAYS ANY CONSIDERATION
TO THE FRANCHISOR OR ITS AFFILIATE THAT RELATES TO THE PROPOSED FRAN-
CHISE SALE. SUCH FOURTEEN CALENDAR DAY PERIOD SHALL COMMENCE THE DAY
AFTER THE DISCLOSURE DOCUMENT IS RECEIVED, OR DEEMED RECEIVED, BY THE
PROSPECTIVE FRANCHISEE. THE FRANCHISOR SHALL DELIVER TO THE PROSPECTIVE
FRANCHISEE A COPY OF THE FRANCHISOR'S CURRENTLY REGISTERED FRANCHISE
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DISCLOSURE DOCUMENT EARLIER IN THE SALES PROCESS UPON THE PROSPECTIVE
FRANCHISEE'S REASONABLE REQUEST.
(B) IF THE FRANCHISE DISCLOSURE DOCUMENT HAS BEEN AMENDED OR OTHERWISE
REVISED AFTER THE FRANCHISOR HAS FURNISHED IT TO THE PROSPECTIVE FRAN-
CHISEE, BUT BEFORE THE FRANCHISE SALE, THEN, EXCEPT AS SET FORTH IN
PARAGRAPH (C) OF THIS SUBDIVISION, THE FRANCHISOR SHALL FURNISH TO SUCH
PROSPECTIVE FRANCHISEE A COPY OF THE FRANCHISOR'S AMENDED OR REVISED
DISCLOSURE DOCUMENT BEFORE THE PROSPECTIVE FRANCHISEE SIGNS AN AGREEMENT
OR MAKES ANY PAYMENT TO THE FRANCHISOR OR ITS AFFILIATE IN CONNECTION
WITH THE SALE OF THE FRANCHISE.
(C) IF THE FRANCHISE DISCLOSURE DOCUMENT HAS BEEN AMENDED OR OTHERWISE
REVISED AFTER THE FRANCHISOR HAS FURNISHED IT TO THE PROSPECTIVE FRAN-
CHISEE, BUT BEFORE THE FRANCHISE SALE, AND SUCH AMENDMENT INCLUDES A
MATERIAL ALTERATION OF THE FRANCHISE AGREEMENT OR ANY RELATED AGREEMENT,
THEN THE FRANCHISOR SHALL FURNISH TO THE PROSPECTIVE FRANCHISEE A COPY
OF EACH SUCH REVISED AGREEMENT AT LEAST SEVEN CALENDAR DAYS BEFORE THE
PROSPECTIVE FRANCHISEE SIGNS AN AGREEMENT OR MAKES ANY PAYMENT TO THE
FRANCHISOR OR ITS AFFILIATE IN CONNECTION WITH THE SALE OF THE FRAN-
CHISE, SUCH SEVEN CALENDAR DAY PERIOD TO COMMENCE THE DAY AFTER THE
FRANCHISOR FURNISHES THE REVISED AGREEMENT TO THE PROSPECTIVE FRANCHI-
SEE. CHANGES TO AN AGREEMENT THAT ARISE OUT OF NEGOTIATIONS INITIATED
BY THE PROSPECTIVE FRANCHISEE DO NOT TRIGGER THIS SEVEN CALENDAR DAY
WAITING PERIOD.
(D) A FRANCHISOR WILL HAVE SATISFIED ITS DISCLOSURE OBLIGATIONS UNDER
THIS SUBDIVISION IF THE FRANCHISOR HAS: (I) HAND DELIVERED, SENT BY
OVERNIGHT DELIVERY SERVICE, FAXED, EMAILED OR OTHERWISE DELIVERED TO THE
PROSPECTIVE FRANCHISEE THE FRANCHISOR'S LATEST REGISTERED FRANCHISE
DISCLOSURE DOCUMENT BY THE REQUIRED DATE OR DATES; (II) FURNISHED TO THE
PROSPECTIVE FRANCHISEE DIRECTIONS FOR ACCESSING THE FRANCHISOR'S LATEST
REGISTERED FRANCHISE DISCLOSURE DOCUMENT ON THE INTERNET OR BY OTHER
READILY ACCESSIBLE ELECTRONIC MEANS BY THE REQUIRED DATE OR DATES; OR,
(III) SENT A PAPER OR TANGIBLE ELECTRONIC COPY, INCLUDING, BUT NOT
LIMITED TO, COMPUTER DISK OR CD-ROM TO THE ADDRESS SPECIFIED BY THE
PROSPECTIVE FRANCHISEE BY FIRST CLASS UNITED STATES MAIL AT LEAST THREE
CALENDAR DAYS BEFORE THE REQUIRED DATE OR DATES.
[9.] 7. (a) A franchisor shall promptly notify the department in writ-
ing, by an application to amend the registered [offering prospectus]
FRANCHISE DISCLOSURE DOCUMENT, of any material change in the information
contained in the [prospectus as originally submitted or amended] DISCLO-
SURE DOCUMENT. The department may further define by rule what is a
material change for the purpose and circumstances under which an amend-
ment of a registered [prospectus] DISCLOSURE DOCUMENT shall be mandato-
ry.
(b) An amendment to a registered [offering prospectus] FRANCHISE
DISCLOSURE DOCUMENT filed after the effective date of the registration
of the original [offering prospectus] FRANCHISE DISCLOSURE DOCUMENT, 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.] 8. (a) Neither the fact that an application for registration of
[an offering prospectus] A FRANCHISE DISCLOSURE DOCUMENT 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]
FRANCHISE DISCLOSURE DOCUMENT, is true, complete or not misleading.
Neither any such fact nor the fact that an exemption is available for a
A. 4880 11
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 pros-
pectus 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.] 9. ALL ADVERTISING, MARKETING AND PROMOTION OF A FRANCHISE OFFER-
ING IN WHATEVER FORM - WHETHER PRINT, BROADCAST, ELECTRONIC OR OTHERWISE
- SHALL BE CONSISTENT WITH THE REPRESENTATIONS AND INFORMATION SET FORTH
IN THE FRANCHISE DISCLOSURE DOCUMENT.
10. (a) Every franchisor [or] AND 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] FRANCHISEES.
(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'
A. 4880 12
fees, shall be borne by the applicant and shall be paid before effec-
tiveness 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 unreli-
able 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 effec-
tiveness of its registration.
[15.] 11. 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.
S 5. Section 684 of the general business law, as added by chapter 730
of the laws of 1980, and subdivision 6 as further amended by section 104
of part A of chapter 62 of the laws of 2011, is amended to read as
follows:
S 684. Exemptions. 1. The department [of law] is hereby authorized and
empowered to exempt by rule or regulation any person, franchise, or
transaction from any provision of section six hundred eighty-three of
this article or from any rule or regulation thereunder if the department
finds that such action is not inconsistent with the public interest or
the protection of prospective franchisees.
2. The department [of law] may, upon application and within its
discretion, exempt from the registration AND DISCLOSURE requirements of
section six hundred eighty-three of this article the offer and sale of a
franchise if:
(a) The franchisor has a net worth on a consolidated basis, according
to its most recently audited financial statement, of not less than five
million dollars; or the franchisor has a net worth, according to its
most [recently audited] RECENT financial statement, of not less than one
million dollars and is at least eighty percent owned by a corporation
which has a net worth on a consolidated basis, according to its most
recently audited financial statement, of not less than five million
dollars; and
(b) The franchisor files with the department [of law] an application
for an exemption, on forms and in the manner prescribed by the depart-
ment, and a consent to service of process on the form required by the
department[; and].
[(c) The franchisor discloses in writing to each prospective franchi-
see, at least seven days prior to the execution by the prospective fran-
chisee of any binding franchise or other agreement, or at least seven
days prior to the receipt of any consideration, whichever occurs first,
the following information:
(1) 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 affil-
iated company that will engage in business transaction with the franchi-
see.
(2) The franchisor's principal business address and the name and
address of its agent in this state authorized to receive process.
A. 4880 13
(3) The business form of the franchisor, whether corporate, partner-
ship, or otherwise.
(4) Such information concerning the identity and business experience
of persons affiliated with the franchisor as the department may by rule
prescribe.
(5) The business experience of the franchisor, including the length of
time the franchisor (i) has conducted a business of the type to be oper-
ated by franchisees, (ii) has granted franchises for such business, and
(iii) has granted franchises in other lines of business.
(6) A copy of the typical franchise contract or agreement proposed for
use and in use in this state, including all amendments, deletions, vari-
ations, and supplements thereto.
(7) 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.
(8) A statement describing any payments or fees other than franchise
fees that the franchisee is required to pay to the franchisor, including
royalties and payments or fees which the franchisor collects in whole or
in part on behalf of a third party or parties.
(9) A statement of the conditions under which the franchise agreement
may be terminated or renewal refused, or repurchased at the option of
the franchisor.
(10) A statement as to whether, by the terms of the agreement or by
other device or practice, the franchisee 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 ther-
eof.
(11) A statement as to whether, by the terms of the franchise agree-
ment or by other device or practice, the franchisee is limited in the
goods or services offered by him to his customers.
(12) A statement of the terms and conditions of any financing arrange-
ments when offered directly or indirectly by the franchisor or his agent
or affiliate.
(13) 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 in whole or in part.
(14) If any statement of estimated or projected franchisee earnings or
income is used, a statement of such estimate or projection and the data,
methods and computations upon which such estimate or projection is
based.
(15) A statement as to whether franchisees receive an exclusive area
or territory.
(16) Other information related to the offer and sale of the franchise
as the department of law may reasonably require.
(d) Applications for exemptions shall be signed and verified by the
franchisor in the same manner provided in the civil practice law and
rules for the verification of pleadings, and shall be filed with the
department of law at its office in the city of New York.]
APPLICATIONS FOR EXEMPTIONS SHALL BE FILED WITH THE DEPARTMENT IN THE
MANNER DESCRIBED IN REGULATIONS PROMULGATED BY THE DEPARTMENT HEREUNDER
UNDER AUTHORITY VESTED BY SECTION SIX HUNDRED NINETY-FOUR OF THIS ARTI-
CLE AND SHALL BE FILED AT THE DEPARTMENT'S OFFICE IN THE CITY OF NEW
YORK OR SUCH OTHER LOCATION AS THE REGULATIONS MAY SPECIFY.
A. 4880 14
3. There shall be exempted from the registration AND DISCLOSURE
provisions of section six hundred eighty-three of this article the offer
and sale of a franchise if:
(a) [(i)] The franchisor has a net worth on a consolidated basis,
according to its most recent audited financial statement, of not less
than fifteen million dollars; or the franchisor has a net worth, accord-
ing to its most recent [audited] financial statement, of not less than
[three] ONE million dollars and is at least eighty percent owned by a
corporation which has a net worth on a consolidated basis, according to
its most recent audited financial statement, of not less than fifteen
million dollars[; and].
[(ii) The franchisor discloses in writing to each prospective franchi-
see, at least seven days prior to the execution by the prospective fran-
chisee of any binding franchise or other agreement, or at least seven
days prior to the receipt of any consideration, whichever occurs first,
such information as is required to be disclosed under subparagraph two
of paragraph (c) of subdivision two of this section.]
(b) The offer or sale is to a bank, savings institution, trust compa-
ny, insurance company, investment company, or other financial institu-
tion, association, or institutional buyer, or to a broker-dealer, where
the purchaser is acting for itself or in some fiduciary capacity.
(c) The transaction is pursuant to an offer directed by the franchisor
to not more than two persons, other than persons specified in this
subdivision, if [the franchisor does not grant the franchisee the right
to offer franchises to others,] a commission or other remuneration is
not paid directly or indirectly for soliciting a prospective franchisee
in this state, and the franchisor is domiciled in this state or has
filed with the department [of law] its consent to service of process on
the form prescribed by the department.
(d) The offer or sale by a franchisor of a franchise to one of [his]
THE FRANCHISOR'S existing franchisees. This exemption shall apply where:
(i) the existing franchisee has actively operated a franchise of the
selling franchisor for the eighteen months preceding the offer; and
(ii) the existing franchisee purchases the franchise in order to oper-
ate the business and not for the purpose of resale; and
(iii) the franchisor reports the sale to the department [of law on the
form required by the department within fifteen days of the sale] IN THE
ANNUAL REPORT REQUIRED BY THIS ARTICLE.
[4. The department of law may, in its discretion, deny or revoke an
exemption with respect to a specific franchisor or transaction, or with-
draw or further condition any exemption enumerated in this section.
5.] (E) THE FRANCHISE RELATIONSHIP IS A FRACTIONAL FRANCHISE.
(F) THE FRANCHISE RELATIONSHIP IS A LEASED DEPARTMENT.
(G) THE FRANCHISE IS GOVERNED BY THE FEDERAL PETROLEUM MARKETING PRAC-
TICES ACT OR ANY SUCCESSOR THERETO, ARTICLE ELEVEN-B OF THIS CHAPTER, OR
SECTION ONE HUNDRED NINETY-NINE OF THIS CHAPTER.
(H)(I) THE FRANCHISEE'S INITIAL INVESTMENT, EXCLUDING ANY FINANCING
RECEIVED FROM THE FRANCHISOR OR AN AFFILIATE AND EXCLUDING THE COST OF
UNIMPROVED LAND, TOTALS AT LEAST ONE MILLION DOLLARS, PROVIDED THAT, IF
THE PROSPECTIVE FRANCHISEE IS AN INVESTOR GROUP, AT LEAST ONE INDIVIDUAL
WITHIN SUCH GROUP QUALIFIES FOR THE EXEMPTION BY INVESTING AT THIS
THRESHOLD LEVEL, AND (II) THE PROSPECTIVE FRANCHISEE SIGNS AN ACKNOWL-
EDGMENT VERIFYING THE GROUNDS FOR THE EXEMPTION.
(I) THE FRANCHISEE OR ITS PARENT OR ANY AFFILIATE IS AN ENTITY THAT
HAS BEEN IN BUSINESS FOR AT LEAST FIVE YEARS AND HAS A NET WORTH OF AT
LEAST FIVE MILLION DOLLARS.
A. 4880 15
(J) ONE OR MORE PURCHASERS OF AT LEAST A FIFTY PERCENT OWNERSHIP
INTEREST IN THE FRANCHISE, WITHIN SIXTY DAYS OF THE SALE, HAS BEEN, FOR
AT LEAST TWO YEARS, AN OFFICER, DIRECTOR, GENERAL PARTNER, INDIVIDUAL
WITH MANAGEMENT RESPONSIBILITY FOR THE OFFER AND SALE OF THE
FRANCHISOR'S FRANCHISES OR AN ADMINISTRATOR OF THE FRANCHISED NETWORK,
OR WITHIN SIXTY DAYS OF THE SALE HAS BEEN, FOR AT LEAST TWO YEARS, AN
OWNER OF AT LEAST A TWENTY-FIVE PERCENT INTEREST IN THE FRANCHISOR.
(K) THE TOTAL REQUIRED PAYMENT BY THE FRANCHISEE TO THE FRANCHISOR
DURING THE FIRST SIX MONTHS AFTER COMMENCING OPERATION OF THE FRANCHISE
IS LESS THAN FIVE HUNDRED DOLLARS.
(L) THE PARTIES CONTEMPLATE, AT THE TIME THE FRANCHISE AGREEMENT IS
SIGNED, THAT ALL FRANCHISED LOCATIONS WILL BE LOCATED OUTSIDE OF THE
UNITED STATES, ITS TERRITORIES AND POSSESSIONS.
4. The offer or sale of a franchise by a franchisee for [his] THE
FRANCHISEE'S own account [or the offer and sale of an entire area fran-
chise owned by a subfranchisor for his own account] is exempted from the
registration AND DISCLOSURE provisions of section six hundred eighty-
three of this article if:
(a) The sale is an isolated sale and not part of a plan of distrib-
ution of franchises; and
(b) The sale is not "effected by or through a franchisor[; and]"
[(c) The franchisee furnishes to the prospective purchaser, at least
one week prior to the execution of any binding contract or purchase
agreement, or at least one week prior to the receipt of any consider-
ation, whichever occurs first, a copy of the offering prospectus of the
franchisor (including amendments, if any) currently registered with the
department of law.]
A sale is not "effected by or through a franchisor [merely because a]"
IF THE franchisor has [a right to approve or disapprove a different
franchisee] NO SIGNIFICANT INVOLVEMENT WITH THE PROSPECTIVE ASSIGNEE;
WILL NOT ENTER INTO A NEW OR SUBSTITUTE FRANCHISE AGREEMENT WITH THE
ASSIGNEE THAT CONTAINS MATERIALLY DIFFERENT TERMS AND CONDITIONS; AND,
DOES NOT OTHERWISE SOLICIT THE ASSIGNEE OR PARTICIPATE IN THE SALE OF
THE SUBJECT FRANCHISE TO THE ASSIGNEE. A FRANCHISOR'S APPROVAL OR DISAP-
PROVAL OF A SALE OR TRANSFER OF AN EXISTING FRANCHISE, STANDING ALONE,
IS NOT DEEMED TO BE SIGNIFICANT INVOLVEMENT.
[6.] 5. This article shall not be applicable to any transaction relat-
ing to a bank credit card plan. "Bank credit card plan" means a credit
card plan in which the issuers of credit cards are only: banks regulated
by or under the supervision of the Federal Reserve Board; the Federal
Deposit Insurance Corporation; the Controller of the Currency of the
United States; or the Superintendent of Financial Services [of this
state]; or persons controlling such banks, provided that the assets of
such a bank or banks represent a majority of the assets on a consol-
idated basis of any holding company system of which such card issuers
may be a party; or, persons controlled by such banks.
S 6. Section 685 of the general business law, as added by chapter 730
of the laws of 1980, is amended to read as follows:
S 685. Escrows and impoundments. If the department [of law] finds that
the applicant for registration has failed to demonstrate that adequate
financial arrangements have been made to fulfill obligations to provide
real estate, improvements, equipment, inventory, training, or other
items included in the offering, the department may require the escrow or
impoundment of franchise fees and other funds paid by the franchisee or
subfranchisor until the obligations are fulfilled, or, at the option of
the franchisor, the furnishing of a surety bond OR THE SATISFACTION OF
A. 4880 16
ANY OTHER CONDITIONS as provided by rule of the department [of law] if
it finds that the requirement is necessary and appropriate to protect
prospective franchisees or subfranchisors.
S 7. Section 686 of the general business law, as added by chapter 730
of the laws of 1980, is amended to read as follows:
S 686. Designation of secretary of state as agent for service of proc-
ess; service of process. [Any person who shall offer to sell or sell a
franchise in this state as a franchisor, subfranchisor or franchise
sales agent] A FRANCHISE SELLER shall be deemed to have irrevocably
appointed the secretary of state as his or its agent upon whom may be
served any summons, complaint, subpoena, subpoena duces tecum, notice,
order or other process directed to such person, or any partner, princi-
pal[,] officer, [salesman] or director thereof, or his or its successor,
administrator or executor, in any action, investigation, or proceeding
which arises under this article or a rule hereunder, with the same force
and validity as if served personally on such person. Service of such
process upon the secretary of state shall be made by personally deliver-
ing to and leaving with him or a deputy secretary of state a copy there-
of at the office of the department [of state], and such service shall be
sufficient provided that notice of such service and a copy of such proc-
ess are sent forthwith by the department to such person, by registered
or certified mail with return receipt requested, at his OR HER address
as set forth in the application for registration of his [offering pros-
pectus] OR HER FRANCHISE DISCLOSURE DOCUMENT or in the registered
[offering prospectus] FRANCHISE DISCLOSURE DOCUMENT itself filed with
the department [of law] pursuant to this article, or in default of the
filing of such application or [prospectus] FRANCHISE DISCLOSURE
DOCUMENT, at the last address known to the department. Service of such
process shall be complete upon receipt by the department of a return
receipt purporting to be signed by the addressee or a person qualified
to receive his or its registered or certified mail, in accordance with
the rules and customs of the post office department, or, if acceptance
was refused or unclaimed by the addressee or his or its agent, or if the
addressee moved without leaving a forwarding address, upon return to the
department of the original envelope bearing a notation by the postal
authorities that receipt thereof was refused or that such mail was
otherwise undeliverable.
S 8. Section 687 of the general business law, as added by chapter 730
of the laws of 1980, is amended to read as follows:
S 687. Fraudulent and unlawful practices. 1. It is unlawful for any
person to make any untrue statement of a material fact in any applica-
tion, notice, statement, [prospectus] FRANCHISE DISCLOSURE DOCUMENT or
report filed with the department under this article, or wilfully to omit
to state in any such application, notice, statement, [prospectus] FRAN-
CHISE DISCLOSURE DOCUMENT or report any material fact which is required
to be stated therein, or to fail to notify the department of any materi-
al change as required by this article.
2. It is unlawful for a person, in connection with the offer, sale or
purchase of any franchise, to directly or indirectly:
(a) Employ any device, scheme, or artifice to defraud.
(b) Make any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not misleading.
It is an affirmative defense to one accused of omitting to state such a
material fact that said omission was not an intentional act.
A. 4880 17
(c) Engage in any act, practice, or course of business [which] THAT
operates or would operate as a fraud or deceit upon any person.
(D) MAKE ANY CLAIM OR REPRESENTATION, ORALLY, VISUALLY, OR IN WRITING,
THAT CONTRADICTS THE INFORMATION REQUIRED TO BE DISCLOSED BY THIS
SECTION.
(E) MISREPRESENT THAT ANY PERSON:
(I) PURCHASED A FRANCHISE FROM THE FRANCHISOR OR OPERATED A FRANCHISE
OF THE TYPE OFFERED BY THE FRANCHISOR.
(II) CAN PROVIDE AN INDEPENDENT AND RELIABLE REPORT ABOUT THE FRAN-
CHISE OR THE EXPERIENCES OF ANY CURRENT OR FORMER FRANCHISEES.
(F) DISSEMINATE ANY FINANCIAL PERFORMANCE REPRESENTATIONS TO PROSPEC-
TIVE FRANCHISEES UNLESS THE FRANCHISOR HAS A REASONABLE BASIS AND WRIT-
TEN SUBSTANTIATION FOR THE REPRESENTATION AT THE TIME THE REPRESENTATION
IS MADE, AND THE REPRESENTATION IS INCLUDED IN THE FRANCHISOR'S DISCLO-
SURE DOCUMENT. IN CONJUNCTION WITH ANY SUCH FINANCIAL PERFORMANCE REPRE-
SENTATION, THE FRANCHISOR SHALL ALSO:
(I) DISCLOSE THE INFORMATION REQUIRED BY THIS ARTICLE AND THE REGU-
LATIONS PROMULGATED HEREUNDER IF THE REPRESENTATION RELATES TO THE PAST
PERFORMANCE OF THE FRANCHISOR'S OUTLETS.
(II) INCLUDE A CLEAR AND CONSPICUOUS ADMONITION THAT A NEW
FRANCHISEE'S INDIVIDUAL FINANCIAL RESULTS MAY DIFFER FROM THE RESULT
STATED IN THE FINANCIAL PERFORMANCE REPRESENTATION.
(G) FAIL TO MAKE AVAILABLE TO PROSPECTIVE FRANCHISEES, AND TO THE
DEPARTMENT UPON REASONABLE REQUEST, WRITTEN SUBSTANTIATION FOR ANY
FINANCIAL PERFORMANCE REPRESENTATIONS MADE IN A FRANCHISOR'S FRANCHISE
DISCLOSURE DOCUMENT OR OTHERWISE.
(H) DISCLAIM OR REQUIRE A PROSPECTIVE FRANCHISEE TO WAIVE RELIANCE ON
ANY REPRESENTATION MADE IN THE DISCLOSURE DOCUMENT OR IN ITS EXHIBITS OR
AMENDMENTS, PROVIDED, HOWEVER, THAT THIS PROVISION IS NOT INTENDED TO
PREVENT A PROSPECTIVE FRANCHISEE FROM VOLUNTARILY WAIVING SPECIFIC
CONTRACT TERMS AND CONDITIONS SET FORTH IN HIS OR HER DISCLOSURE DOCU-
MENT DURING THE COURSE OF FRANCHISE SALE NEGOTIATIONS.
(I) FAIL TO RETURN ANY FUNDS OR DEPOSITS IN ACCORDANCE WITH ANY CONDI-
TIONS DISCLOSED IN THE FRANCHISOR'S DISCLOSURE DOCUMENT, FRANCHISE
AGREEMENT, OR ANY RELATED DOCUMENT.
3. It is unlawful for any person to violate any provision of this
article, or any rule of the department promulgated hereunder, or any
condition to the effectiveness of the registration of [an offering pros-
pectus] A FRANCHISE DISCLOSURE DOCUMENT or of an exemption from the
registration provisions of this article.
4. Any condition, stipulation, or provision purporting to bind any
person acquiring any franchise to waive compliance with any provision of
this law, or rule promulgated hereunder, shall be void.
5. It is unlawful to require a franchisee to assent to a release,
assignment, novation, waiver or estoppel [which] THAT would relieve a
person from any duty or liability imposed by this article.
S 9. Subdivision 1 of section 688 of the general business law, as
added by chapter 730 of the laws of 1980, is amended to read as follows:
1. Whenever it shall appear to the department [of law], either upon
complaint or otherwise, that any person has violated any provision of
this article, the department:
(a) may make such investigations within or outside of this state as it
deems necessary to determine whether any person has violated any
provision of this article or any rule or regulation hereunder, or to aid
in the enforcement of this article or in the prescribing of rules and
forms hereunder, and
A. 4880 18
(b) may require or permit any person to file a statement in writing,
under oath or otherwise as the attorney general determines, as to all
the facts and circumstances concerning the matter to be investigated.
S 10. Section 689 of the general business law, as added by chapter 730
of the laws of 1980, is amended to read as follows:
S 689. Action by the department of law. 1. Whenever the department
shall believe from evidence satisfactory to it that any person has
engaged in or is engaged in or is about to engage in any practice or
transaction heretofore referred to as and declared to be an unlawful or
a fraudulent practice, it may bring an action in the name and on behalf
of the people of the state of New York against such person and any other
person theretofore concerned in or in any way participating in such
unlawful or fraudulent practice, to enjoin such person or persons from
continuing such unlawful and fraudulent practice or engaging therein or
doing any act or acts in furtherance thereof or, if the department
should believe from such evidence that such person actually has or is
engaged in any such unlawful or fraudulent practice, it may include in
such action an application to enjoin permanently such person and such
other person as may have been or may be concerned with or in any way
participating in such unlawful or fraudulent practice, from selling or
offering for sale within or from this state as franchisor, franchise
[sales agent, franchise salesman] SELLER, or a principal EXECUTIVE OFFI-
CER OR DIRECTOR thereof, any franchise offered or to be offered or sold,
or from continuing any such practice. In said action an order or a judg-
ment may be entered awarding the relief applied for or so much thereof
as the court may deem proper. Upon a showing by the department in its
application for a permanent injunction hereunder that the defendant
named in the action or an officer thereof has refused to be sworn or to
be examined or to answer a material question or to produce a book or
paper relevant to the inquiry when duly ordered to do so by the officer
or judge duly conducting an inquiry into the subject matter forming the
basis of the application for such injunction, such refusal shall be
prima facie proof that such defendant is or has engaged in an unlawful
or fraudulent practice as set forth in such application and a permanent
injunction may issue from the supreme court without further showing by
the department. In an action brought under this section the court may
award to the plaintiff a sum not in excess of ten thousand dollars for
each defendant as an additional allowance.
2. Upon a showing by the department, in an application for an injunc-
tion, that any person engaged in the offer or sale of a franchise in
this state has ever been convicted by a court of competent jurisdiction
in any state or county of any felony or of any other criminal offense by
any such court, whether or not constituting a felony, involving fran-
chises, securities or subdivided land, the supreme court after a hearing
may issue a permanent injunction awarding the relief applied for, or so
much thereof as the court may deem proper, against such person shown to
have been so convicted, in the form and manner provided for in subdivi-
sion one of this section in the case of one who actually has or is
engaged in any unlawful or fraudulent practice.
3. If a franchise is offered or sold within the state of New York by a
non-resident person and such non-resident person has not filed pursuant
to laws heretofore or hereafter existing the designation of a person
upon whom process against him or it may be served or the designation of
the secretary of state as such person, pursuant to section thirteen
hundred four of the business corporation law or other laws heretofore or
hereafter existing, or in lieu thereof, an instrument in writing duly
A. 4880 19
acknowledged and filed in the office of the secretary of state designat-
ing the secretary of state as the person upon whom may be served any
subpoena, subpoena duces tecum or other process directed to such non-re-
sident person and issued in any investigation, examination or proceeding
pending or about to be instituted under and pursuant to the provisions
of this article, the department may serve a notice upon such non-resi-
dent person by mailing the same in a securely sealed postpaid wrapper
addressed to such non-resident person at its or his last known place of
business or residence, and may in such notice require that such non-re-
sident person furnish a written statement under oath, as required in
said notice, giving the information therein specified relating to the
franchise offered, to be offered or sold in the state of New York by
such non-resident person or, in the alternative, that such non-resident
person shall appear within a reasonable time from the date of mailing
such notice at a designated place within this state for examination and
shall produce at the time and place of such examination such books and
papers of such non-resident person as may be designated in such notice.
If such non-resident person shall fail to appear pursuant thereto or
to produce the books and papers required thereby to be produced, or
shall refuse to submit to examination or to answer any proper question,
the proof of such failure or refusal shall constitute prima facie
evidence that the offer or sale of a franchise by such non-resident
person constitutes a fraudulent practice and may in the discretion of
the court be treated as a sufficient basis for a permanent injunction
against the continuance of such fraudulent practice.
4. In any action brought by the department as provided in this arti-
cle, the court at any stage of the proceedings may appoint a receiver of
any and all property derived by the defendant or defendants or any of
them by means of any such unlawful or fraudulent practice, including
also all property with which such property has been commingled if such
property cannot be identified in kind because of such commingling,
together with any or all books of account and papers relating to the
same. The judgment entered in such action may provide that such receiver
shall take title to any or all such property and books of account and
papers relating to the same and liquidate such property or any part
thereof for the benefit of all persons intervening in the said action
and establishing an interest in such property. The judgment may also
provide that all such property, the title to or interest in which has
not been established in such action by intervenors or otherwise by due
process to be in a person or persons other than defendant or defendants,
shall be returned to the defendant or defendants as their interest may
appear. Such receiver shall be subject to all the duties of receivers in
civil actions as far as practicable except that such provisions relating
to commissions or compensation of receivers shall not be applicable to
receivers appointed pursuant to this section, but such commissions or
compensations shall be fixed by the court in any amount which it may
determine to be just and equitable. In any action brought by the depart-
ment as provided in this article the court may grant such other and
further relief as may be proper.
5. Whenever the department has determined to commence an action under
this article, it may present to any justice of the supreme court, before
beginning such action, an application in writing for an order directing
the person or persons mentioned in the application to appear before the
justice of the supreme court or referee designated in such order and
answer such questions as may be put to them or to any of them, or to
produce such papers, documents and books concerning the alleged unlawful
A. 4880 20
or fraudulent practices to which the action which the department has
determined to bring relates, and it shall be the duty of the justice of
the supreme court to whom such application for the order is made to
grant such application. The application for such order may simply show
upon information and belief that the testimony of such person or persons
is material and necessary. The provisions of the civil practice law and
rules, relating to an application for an order for the examination of
witnesses before the commencement of an action and the method of
proceeding on such examination, shall not apply except as herein
prescribed. The order shall be granted by the justice of the supreme
court to whom the application has been made with such preliminary
injunction or stay as may appear to such justice to be proper and expe-
dient and shall specify the time when and place where the witnesses are
required to appear. The justice or referee may adjourn such examination
from time to time and witnesses must attend accordingly. The testimony
of each witness must be subscribed by him and must be filed in the
office of the clerk of the county in which such order for examination is
filed.
6. The order for such examination must be signed by the justice making
it, and service of a copy thereof with an endorsement by the department
to the effect that the person named therein is required to appear and be
examined at the time and place before the justice and referee specified
in such endorsement, shall be sufficient notice for the attendance of
witnesses. Such endorsement may contain a clause requiring such person
to produce at such examination all books, papers and documents in his
possession or under his control relating to the subject of such examina-
tion. The order shall be served upon the person named in [the] SUCH
endorsement [aforesaid] by delivering to and leaving with it or him a
certified copy thereof, endorsed as above provided, subject to the
payment of witness fees and mileage as and when provided to be paid by
paragraph (b) of subdivision four of section six hundred eighty-eight of
this article in connection with attendance pursuant to subpoenas author-
ized to be issued under [said] SUCH section. Service of such an order
may also be served under section six hundred eighty-six of this article
in cases falling thereunder.
7. The referee appointed as provided in this article possesses all the
powers and is subject to all the duties of a referee appointed in a
civil action, so far as practicable, and may punish for contempt a
witness duly served with the papers as prescribed in this article for
non-attendance or refusal to be sworn or to testify or to produce books,
papers and documents according to the direction of [the] SUCH endorse-
ment [aforesaid] in the same manner and to the same extent as a referee
to hear, try and determine an issue of fact or law.
8. Any person against whom a permanent injunction has been granted
under the provisions of this article may apply to the supreme court at
any time upon at least sixty days notice to the department for an order
dissolving such injunction or modifying the same upon such terms and
conditions as the court deems necessary or desirable. Such application
for dissolution or modification of such injunction shall contain a reci-
tation of the facts and circumstances which caused the granting of the
injunction; the occupation and employment of the person making the
application and his financial remuneration therefrom since the time the
injunction was granted; his net worth at the time of the application and
the source thereof; together with any other facts bearing upon the
reasonableness of the application and the character of the applicant as
may enable the court to issue an order that will properly dispose of
A. 4880 21
such application in the interest of justice. A copy of such application
together with copies of any other papers in support thereof shall be
served upon the department at least sixty days prior to the return date
thereof. In addition thereto the applicant shall file with the court a
good and sufficient surety bond in the sum of one thousand dollars guar-
anteeing that he will pay all costs and expenses of an investigation by
the department of such applicant and the statements and claims alleged
in the application together with any further investigation which the
department may deem necessary or desirable to determine whether it
should consent to the application, oppose the same, or make such other
recommendations to the court as in its opinion are desirable to be
included in any modification of such injunction. Should it appear in the
course of such investigation by the department that said sum is not
sufficient, the department may apply to the court by usual notice of
motion or order to show cause for an increase in the amount of security
or further surety bond necessary to fully pay all of the costs of the
investigation and the court may require such further bond as the situ-
ation requires to fully pay the costs and expenses of the investigation.
Upon the completion of such investigation, the department may file an
answer to such application setting forth such facts as are pertinent to
the determination by the court of the matter before it and whether said
injunction should be dissolved, modified or continued in whole or in
part and what conditions, if any, shall be attached to any dissolution
or modification of said injunction. After a hearing upon such applica-
tion and after any further investigation, proof or testimony which the
court may desire has been offered, or at any adjourned dates thereof,
the court may make a final order dissolving the permanent injunction or
modifying the same upon such terms and conditions as in its opinion are
just and desirable, or in its discretion may deny the application. Such
order shall contain a direction that the applicant pay to the department
the costs and expenses of the investigation in connection with the
proceeding, and any judgment entered thereon may be enforced directly
against the surety on the bond. The court shall grant no temporary or
other relief from the injunction in force pending a final determination
of such application. No application under this subdivision shall be
entertained:
(a) in any case where the applicant has been convicted of a felony or
a crime that would be a felony if committed in the state of New York
since the issuance of the injunction, nor
(b) in any case where the injunction was granted incident to a felony,
or the applicant has been convicted at any time of any felony involving
franchises which are the subject matter of this article. Nor shall
anything contained in this subdivision be construed to deny to or inter-
fere with the power of the department to bring any other action or
proceeding, civil or criminal, against the applicant at any time.
9. The provisions of the civil practice law and rules shall apply to
all actions brought under this article except as herein otherwise
provided.
S 11. Section 691 of the general business law, as added by chapter 730
of the laws of 1980, subdivision 4 as amended by chapter 86 of the laws
of 1981, is amended to read as follows:
S 691. Civil remedies. 1. A person who offers or sells a franchise in
violation of section six hundred eighty-three, six hundred eighty-four
or six hundred eighty-seven of this article is liable to the person
purchasing the franchise [for damages and, if such violation is willful
and material,] for rescission, with interest [at six percent per year]
A. 4880 22
from the date of purchase, [and] AT AN ANNUAL INTEREST RATE SET FORTH IN
OR DETERMINED IN ACCORDANCE WITH RULES OR REGULATIONS PROMULGATED BY THE
DEPARTMENT, AND IF SUCH VIOLATION IS WILLFUL AND MATERIAL, FOR DAMAGES,
IN EACH INSTANCE ALONG WITH reasonable attorney fees and court costs.
2. A person may not file or maintain suit under this section if the
franchisee or such person received a written offer before suit, and at a
time when he owned the franchise, to refund the consideration paid
together with interest at [six percent per year] AN ANNUAL RATE SET
FORTH IN OR DETERMINED IN ACCORDANCE WITH RULES OR REGULATIONS PROMUL-
GATED BY THE DEPARTMENT from the date of payment, less the amount of
income earned by the franchisee from the franchise, conditioned only
upon tender by the person of all items received by him for the consider-
ation and not sold, and failed to accept the offer within thirty days of
its receipt, provided that the offering documents are submitted to the
department for approval at least ten business days prior to submission
to the franchisee. The rescission offer shall recite the provisions of
this section. If the franchise involves a substantial building or
substantial equipment or fixtures and a significant period of time has
elapsed since the sale of the franchise to the franchisee, the depart-
ment in approving a rescission offer may approve an equitable offer
recognizing depreciation, amortization, and other factors which bear
upon the value of the franchise being returned to the franchisor. Noth-
ing in this subdivision shall prohibit settlement of any dispute arising
under or involving claims based on this chapter, with or without
approval of the department.
3. A person who directly or indirectly controls a person liable under
this article, a partner in a firm so liable, a principal executive offi-
cer or director of a corporation so liable, a person occupying a similar
status or performing similar functions, and an employee of a person so
liable, who materially aids in the act of transaction constituting the
violation, is also liable jointly and severally with and to the same
extent as the controlled person, partnership, corporation or employer.
It shall be a defense to any action based upon such liability that the
defendant did not know or could not have known by the exercise of due
diligence the facts upon which the action is predicated.
4. An action shall not be maintained to enforce a liability created
under this section unless brought before the expiration of three years
after the act or transaction constituting the violation.
5. Except as explicitly provided in this article, civil liability in
favor of any private party shall not arise against a person by impli-
cation from or as a result of the violation of a provision of this arti-
cle or a rule, regulation or order hereunder. Nothing in this article
shall limit a liability which may exist by virtue of any other statute
or under common law if this article were not in effect.
S 12. Section 694 of the general business law, as added by chapter 730
of the laws of 1980, subdivision 1 as amended by chapter 61 of the laws
of 1989, is amended to read as follows:
S 694. Administration. [1. The department shall charge and collect the
fees fixed by this section.
(a) The fee for filing an application for registration of an offering
prospectus under subdivision two of section six hundred eighty-three of
this article is seven hundred fifty dollars.
(b) The fee for filing an amendment to any registered offering pros-
pectus filed under subdivision two, nine or thirteen of section six
hundred eighty-three of this article is one hundred fifty dollars.
A. 4880 23
(c) The fee for filing a franchise agent's application under subdivi-
sion thirteen of section six hundred eighty-three of this article is one
hundred fifty dollars.
2.] The department may from time to time make, amend, and rescind such
rules, forms and regulations as are necessary to carry out the
provisions of this article, including rules and forms governing applica-
tions and reports, and defining any terms, whether or not used in this
article, insofar as the definitions are not inconsistent with the
provisions of this article.
S 13. This act shall take effect immediately.