RUDNICK, WOLFE, EPSTIEN, & ZEIDMAN
A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
WRITER'S DIRECT LINE:
July 10, 1997
Donald S. Clark
Re: 16 C.F.R. 436, Comment on Behalf of Entrepreneur Media, Inc.
Dear Mr. Clark:
This comment is submitted on behalf of Entrepreneur Media, Inc. Entrepreneur engages in activities - typically referred to as trade show promotions - designed to bring exhibitors and prospective purchasers of a franchise or business opportunity together in a single location, thereby allowing the dissemination of information concerning the possible purchase of a franchise or business opportunity.
The FTC's Interpretive Guides issued on July 21, 1979 expressed the FTC's interpretation that trade show promoters were "franchise brokers," as that term is defined in Section 436.20) of the Franchise Rule. On October 13, 1981, the FTC issued a conditional exemption for trade show promoters. The FTC now is conducting a proceeding to determine the need to amend the Franchise Rule, and among the issues being considered are whether (I) the FTC should continue to interpret the franchise broker definition as encompassing trade show promoters; and (ii) trade show promotions require any special form of regulation. In the Advance Notice of Proposed Rulemaking dated February 28, 1997, the FTC concluded, after reviewing the rule review record which was opened in the summer of 1995 and which includes, among other things, a comment (copy enclosed) filed on behalf of two trade show promoters, including Entrepreneur Media, Inc., that:
We agree with the FTC's analysis. The issues, then, are: (1) how to implement the FTC's conclusion that trade show promoters are not franchise brokers; and (2) whether trade show promotions require additional regulation.
I. Clarifying that Trade Show Promoters Are Not Franchise Brokers
The only conclusion that can result from the foregoing FTC analysis of the rule review record is that trade show promoters are not franchise brokers. Accordingly, we recommend that the Franchise Rule be amended to state explicitly that trade show promoters are not franchise brokers. We believe this can be accomplished by amending 436.20(j) by inserting the following phrase:
Thus, 436.26(j), as amended, would read as follows:
II. II. Need for New Regulations Governing Trade Show Promotions
The Advance Notice of Proposed Rulemaking solicits comments on the feasibility of requiring the availability at trade shows for inspection by attendees of either a specimen copy of each exhibitor's offering circular or a letter from the exhibitor's attorney indicating why no offering circular is required. The expressed rationale for this requirement is to permit prospective franchisees to "readily be able to verify ... various oral or written misrepresentations or unsubstantiated earnings claims." We question the assumption implicit in the idea that there is a unique quality about trade show promotions not present in any other method used to offer franchises or business opportunities that increases the risk of unlawful conduct or consumer injury and, thus, requires special regulation; we also doubt whether any new regulation will specifically address and mitigate any increased risk -- assuming it exists -- without imposing an unreasonable burden on those who must comply with the new regulation.
A. The Trade Show Promotion
Trade shows are one of several methods used by franchisors to identify prospective franchisees. Franchisors' compliance obligations under the Franchise Rule, such as the timing of required disclosures, and the type of information provided or sales practices employed by franchisors, apply to their activities at trade shows in the same manner as in any other form of solicitation for franchisees. We are unaware of any unique feature of a trade show promotion which increases the risks of unlawful conduct or consumer injury nor, to our knowledge, has the FTC or any commentator identified any such feature. In addition, in the more than 100 Franchise Rule enforcement actions brought by the FTC in the nearly 18 years since the Franchise Rule has been in effect, we have not discerned any pattern or practice to suggest that trade show promotions contribute to or increase the risk of unlawful conduct or consumer injury. Unlawful practices occur, unfortunately, in all forms of solicitation formats, and while we, of course, neither condone nor support unlawful conduct, we oppose any attempt to impose regulatory responsibilities on trade show promoters or trade show promotions unless and until evidence is presented to demonstrate a special risk of their occurrence at trade show promotions. We also note that trade shows have been singled out for special attention, since the proposal would not apply to other entities -- such as the media - which perform the same function through the sale of advertising as trade show promoters, in bringing a seller and a purchaser together, or in any other form of franchisee solicitation format in which unlawful conduct or consumer injury has been found to occur.
B. Compliance Burdens
It seems odd to propose a remedy for a risk which has neither been identified nor quantified.
In theory, the proposed display obligation appears innocuous; in practice, however, it has many problems. First, what happens if an attendee (or another exhibitor) removes an exhibitor's offering circular without authorization? Must the exhibitor cease all informational activities? Second, what offering circular must be displayed?
Exhibitors may use several versions of the same offering circular, ie., an offering circular for nonregistration states, one or more state-specific offering circulars, or a nonregistration offering circular accompanied by one or more state-specific addenda. Thus, the offering circular applicable to the state in which the show is presented may not be the version required to be furnished to a prospective franchisee in a transaction governed by a franchise registration statute. And, will the trade show promoter have the responsibility to ensure that the offering circular is either complete or accurate (or even current); if so, how will the trade show promoter reasonably know this information?
A more fundamental question, however, is identifying the benefit that will result from the required display of offering circulars or attorney letters. If an attendee is interested in pursuing the possible purchase of a franchise, the FTC currently requires the franchisor to provide the attendee with an offering circular as soon as a serious personal discussion occurs, and at the same time and in the same manner as with any other prospective franchisee identified by any other solicitation format. Thus, attendees currently have a means to "readily be able to verify" sales claims. If an attendee is not interested in the proposed franchise purchase, the attendee is not affected by an unlawful sales claim, bears no risk of injury, and has no need for disclosure. Conversely, if the FTC feels that there is merit in requiring a 'pre-disclosure" disclosure as a means of reducing the possibility of unlawful conduct, we wonder why a "pre-disclosure" disclosure requirement not equally meritorious to all other entities and solicitation formats used by franchisors and business opportunity sellers to identify prospective purchasers.
Finally, we believe that any additional regulatory burdens being considered should be imposed on the sellers of franchises and business opportunities who may engage in unlawful conduct, and not on the trade show promoters who do not participate in any way in the sales process.
In conclusion, we urge the Commission to adopt a proposed amendment to Section 436.2(j) to explicitly exclude trade show promoters from the definition of franchise brokers, and to defer consideration of additional regulatory responsibilities on trade show promoters or exhibitors until more information is place on the rule review record concerning the assumed risk, its prevalence, and its applicability to other forms of solicitation of franchisees.
RUDNICK, WOLFE, EPSTIEN & ZEIDMAN
By: John M. Tifford