Changes to Virginia Retail Franchising Act modify registration requirements
James Wilson is a partner with Wilson Stoyanoff, PLC in Richmond, VA and serves as a Governor on the Antitrust, Franchise & Trade Regulation Section of the Virginia State Bar. He represents franchisors and franchisees in business transactions and registrations.
On March 20, Gov. Tim Kaine of Virginia signed legislation that changed a long-debated aspect of franchise offering registration in the state. The change to the Retail Franchising Act will become effective on July 1, 2007.
Previously, section 13.1-562A of the Virginia Retail Franchising Act denied the Virginia State Corporation Commission (SCC) the regulatory authority in Virginia for franchise registration, the ability to register franchise offerings for franchisors that had a negative or thin balance sheet. In other states this situation was remedied by putting franchise fees into escrow or by deferring the franchisor’s receipt of the fees if the franchisor was deemed to be at financial risk. The new Virginia legislation now will allow for the escrow or deferral of franchise fees in Virginia until the franchisor’s pre-opening obligations have been fulfilled.
In the past, the SCC could not register a franchise offering if the franchisor was insolvent, in danger of becoming insolvent, or because the franchisor could not meet its obligations. Without this new legislation, there was no way to work around this situation to get a franchise offering registered in Virginia.
The new legislation also provides for the SCC to enact by regulation an exemption to registration. In proposed regulations that are slated to go into effect July 1 unless the public hearing process invokes changes, the SCC proposes an exemption for “seasoned” franchisors and “sophisticated” franchisees. A seasoned franchisor is defined in the proposed regulations as a franchisor that has a net equity of $15 million on a consolidated basis or a net equity of $1 million and is at least 80 percent owned by a business entity that has a net equity of at least $15 million and the business entity guarantees the franchisor’s obligations. A franchisor can also meet the seasoned franchisor definition by having at least 25 franchisees conducting the same franchise business at all times during the five-year period immediately preceding the offer or grant of the new franchise in Virginia, or by requiring an initial investment by the franchisee of $100,000. The “sophisticated franchisee” exemption exempts from registration an offer or grant of a franchise for which the franchisor requires an initial investment of more than $1 million.
With these changes to the Virginia Franchise Retail Act, Virginia joins all other franchise registration states in allowing for an escrow or deferral of franchise fees or the posting of a bond to allow growing franchise systems a way to register their franchise offering circular when their balance sheets are a little weak—without endangering the potential franchisees who purchase franchises from them in the state. Additionally, the proposed regulations will exempt those franchisors that have sufficient financial wherewithal to run their systems without going through an annual review by the state.