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After twenty years in Washington DC, the International Franchise Expo has now moved to New York City.

But, New York State's outdated franchise law is a potential obstacle for exhibitors at the largest franchise expo in the country. New York State, of course, requires franchisors to register with the Attorney General's Office before offering or selling franchises. Registered franchisors will have no problem exhibiting at the show and engaging in discussions with prospective franchisees.

But franchisors that are not registered in New York must clear a regulatory hurdle before they can lawfully exhibit at the Expo. The reason is the "first personal meeting" requirement under the New York Franchise Act.

The New York Attorney General's Office has been working hard to ensure that every exhibitor is either registered or exempt. And this is happening at the busiest time of year for the franchise examiners. They're in the midst of reviewing the annual franchise renewal applications.

The "First Personal Meeting" Requirement

Under New York law, a franchise may not be sold without providing to the prospective franchisee a copy of its registered prospectus at the earlier of (a) the first personal meeting between the franchisor or its agent and the prospective franchisee or (b) 10 business days before the parties sign a binding franchise or other agreement or before the franchisor receives any consideration in connection with the sale of a franchise. "First personal meeting" means the first face to face meeting between the franchisor or the franchisor's representative and a prospective franchisee that is held for the purpose of discussing the sale or possible sale of a franchise.

If New York did not have a "first personal meeting" requirement, an unregistered franchisor could exhibit at the trade show and inform each prospective franchisee that the franchisor is not yet registered in the state and that it cannot offer or sell franchises in or from New York until it is. But discussion would be welcome. Just leave your name and we'll get back to you. The franchisor could make the offer at a later date, after the Attorney General's Office approves the franchisor's application for franchise registration and the franchisor has delivered the registered disclosure document to the prospect and waited the required ten business days.

To play it safe, the franchisor could put this in writing in a flier it distributes to prospects. The franchisor could even put a sign on its booth saying it's not registered in New York. The sign and flier would help the franchisor defend against an allegation of making an illegal offer of an unregistered franchise. The sign and flier might also satisfy a New York state regulator prowling the exhibit hall.

New York's Special Expo Exemption

But these steps are not sufficient to meet the requirements of New York law. Fortunately, the New York State Attorney General's Office has devised a solution. In order to facilitate the Expo's move to New York City, the New York State Attorney General's Office offers unregistered franchisors a temporary exemption that specifically covers the Expo in New York City.

An unregistered franchisor needs a special exemption in order to do in New York what franchise trade show exhibitors do everywhere else without an exemption.

While the New York Franchise Act is extremely broad, one saving component of the law is that fact that it allows for discretionary exemptions. The law authorizes the Attorney General's Office to grant a discretionary exemption if it finds that the exemption is not inconsistent with the public interest or the protection of prospective franchisees. In this case, the Attorney General's Office created a specific discretionary exemption for the Expo.

But franchisors must apply for this exemption. It is not self executing. And there is no certainty that it will be granted. The exemption does not allow exhibitors to sell franchises, but only to discuss the possible sale of franchises in person at the Expo in New York City during its three day run. A franchisor who receives this exemption and is registered in other states or only selling franchises in non-registration states may not even provide its franchise disclosure document at the show.

It makes no difference if the recipient is a New Yorker considering opening a franchise location in the state or whether the recipient is a New Jersey resident with no plans to open a location in New York, or whether the franchisor has any connection with the state other than its participation in the expo.

The limited exemption requires the unregistered franchisor to display a standard notice conspicuously at the booth informing visitors that the franchisor is not registered. In order to obtain the exemption, the franchisor must also submit to the Attorney General's Office a copy of any promotional materials to be distributed at the Expo. A special handout must be included with all such materials at the Expo informing recipients that the franchisor is not registered to sell franchises in New York.

The exemption application must include certain information that would normally be included in a franchise disclosure document, such as the names and employment history of the franchisor's managers and the relevant litigation of the franchisor and its affiliates.

The applicant must acknowledge that if franchises are sold without registration, the franchisor and its representatives may be subject to civil and criminal penalties. In fact, the franchisor must agree that if any of its employees or representatives violates a condition of the exemption, the franchisor will pay liquidated damages to the Attorney General's Office in the amount of $10,000 for each violation. In addition, the applicant must acknowledge that the Attorney General's Office may seek injunctive relief, which can bar the franchisor from selling in New York at all. And the applicant company must sign a consent to service of process in the state.

The Attorney General's Office also charges a $450 filing fee for the three-day Expo exemption. The application must also include a Notice of Appearance signed by a representative of the franchisor. This representative may well be the company's attorney, who will also charge legal fees on top of the filing fee.

By the time the process is completed, one might conclude that it would be better to apply for franchise registration.

The Need for a Change

The best approach would be a change in New York law. The New York Franchise Act is an anachronism. An exemption is nice, but New York really should change its law to be consistent with federal law and the laws of most other states that require franchise registration.

The Federal Trade Commission (FTC) eliminated the "first personal meeting" disclosure trigger as one of many changes it made with its 2007 revised trade regulation rule on franchising. Because franchisors and prospective franchisees may have numerous telephone conversations and communications by email longer before any face-to-face meeting occurs, the FTC determined that the "first personal meeting" trigger was an unnecessary requirement.

The FTC also replaced the 10 business day trigger with a 14 calendar day disclosure trigger. California eliminated the first personal meeting requirement in 2008. Other registration states, like Illinois, Maryland and Washington, have also modified their laws to conform to the revised FTC rule. But New York has not.

The "first personal meeting" is what trade shows are all about. It is a shame that New York requires registration or an exemption just to exhibit at a trade show. I wonder how many prospective exhibitors may have been discouraged from appearing at the show because of the requirements of New York law?

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