State of Maryland
200 Saint Paul Place Baltimore, MD 21202-2020
Dale E. Cantone
July 25, 1997
Donald S. Clark, Secretary
Re: CFR Part 436--Comment
Dear Secretary Clark:
I am writing in response to the federal Trade Commission's Advance Notice of Proposed Rulemaking ("ANPR") to amend the FTC's Trade Regulation Rule on Disclosure Requirements and Prohibitions concerning Franchising and Business Opportunity Ventures (the "Franchise Rule"). Commissioner Robert N. McDonald has asked me to provide a comment on behalf of the Maryland Division of Securities (the "Division") of the Office of the Maryland Attorney General.
The purpose of this comment is to discuss the issue of trade show promoters. This comment is being sent in anticipation of the public workshop on this topic scheduled for, Monday, July 28, 1997 in Washington, D.C. The Division anticipates that it will be filing a supplementary, more comprehensive comment in response to the ANPR at a later date.
The Division administers and enforces a number of investor protection laws in Maryland, including the Maryland Franchise Registration and Disclosure Law. Title 14, Subtitle 2, Business Regulation Article, Annotated Code of Maryland (1992 Repl. Vol. and 1995 Cum .Supp.) (the "Franchise Law") and the Maryland Business Opportunity Sales Act, Title 14, Subtitle 1, Business Regulation Article, Annotated Code of Maryland (1992 Repl. Vol. and 1996 Cum. Supp.) (the "Maryland Act"). I am the chief of the Division's Franchise and Business Opportunity Unit and Chair of the Franchise and Business Opportunity Committee of the North American Securities Administrators Association ("NASAA").
In the last several years, the Division has experienced an increasing number of complaints from Maryland investors in "business opportunities." The Division has increased our enforcement and education efforts in this area, and we supported the passage of a 1996 revision to the Maryland Act. Among other provisions, the 1996 revision to the law increases the enforcement options available to the Division so that we are able to take more effective action against business opportunity fraud.
On August 10, 1995, Securities Commissioner Robert N, McDonald, on behalf of the Division, submitted an initial response to the Federal Trade Commission's request for public comment on the Franchise Rule. In that comment, the Commissioner expressed the opinion that the FTC should not revoke the present conditional exemption for trade show promoters, that is, that the FTC maintain conditions for promoters to be exempt from the Franchise Rule. As the Commissioner discussed in that comment, trade shows provide a forum for many business opportunity sellers to reach a large number of potential investors. Under the current federal scheme, trade show promoters have little incentive to police the activities of the business opportunity sellers. These sellers pay a fee to the promoter for space to exhibit at their shows. In the past, the Division has had only limited success in convincing trade show promoters to give us advance notice of Maryland shows, so that we can make sure that all exhibitors have appropriate disclosure documents and have otherwise complied with the Maryland Act.
The Division has had some experience in the last several years with trade shows that exhibit franchises and business opportunities. We have found that there are several issues of concern in this area. Some exhibitors at trade shows are not registered with the Division, as required under the Maryland Act. Some exhibitors do not provide disclosure statements to prospective purchasers, which is required under both the Maryland Act and the Franchise Rule. Exhibitors may make unlawful earnings claims as part of their sales efforts, or engage in other deceptive or misleading sales practices.
The FTC now seeks comments an a number of questions. The first is whether the FTC should modify the Franchise Rule to exempt show promoters. The second is whether the FTC should require that show exhibitors have "readily available for public inspection" a copy of their disclosure documents or a letter from an attorney explaining why they are not required to comply with the disclosure requirement of the Franchise Rule. Third, in the alternative, is whether the FTC should modify the definition of first "personal meeting" to require exhibitors to have disclosure documents readily available at trade shows or a letter from their attorney explaining why they are not required to comply with the disclosure obligations of the Franchise Rule.
With regard to the issue of exempting trade show promoters from the Franchise Rule, the Division suggests that trade show promoters should maintain some responsibility under the Franchise Rule for sales activities that take place at trade shows. Trade show promoters undoubtedly are aware of the abuses by some exhibitors to whom they provide this forum. They should not be allowed to present a show to the public without accepting some responsibility to warn that public about potential problems and the protections available under federal and state laws.
Under current federal requirements, trade show promoters are required to distribute notices about the requirements of the Franchise Rule in order to qualify for an exemption under the Franchise Rule. These notices are inadequate to effectively advise prospective investors about the law. A person attending a trade show is given a significant amount of sales literature, most of it consisting of glossy advertisements, color photographs, and eye-catching brochures. The present form of notice is often lost among all of the other literature. Trade show promoters have the means and the opportunity to post more readable notices to the public about the requirements of applicable laws, and to warn them about misleading sales practices, including the making of unlawful earnings claims. Promoters should be required to post, in conspicuous locations, warnings to the public in order to maintain their exemption from the requirements of the Franchise Rule. Those warnings should also include information about federal and state laws that relate to the sale of franchises and business opportunities.
The Division also would favor a requirement that trade show promoters must verify with each applicable state authority that every company exhibiting at the show has been properly registered with state authorities, if applicable, and that the exhibitor has an approved form of disclosure document, if required. Alternatively, the promoters should be required to give reasonable advance notice (at least fifteen days) to the applicable state or federal authorities whenever the promoter schedules a trade show. Reasonable advance notice should also identify the names of the exhibitors scheduled to participate in the trade show.
With regard to the second question presented in the ANPR, the Division favors a requirement that trade show exhibitors must have readily available for public inspection a specimen copy of a disclosure document, or a letter from an attorney stating that the seller d not need to meet the FTC's requirements. The definition of "readily available" should include a requirement that trade show promoters provide, to federal and state authorities or some type of central registry, advance copies of disclosure documents or a letter from an attorney explaining why a disclosure document is not required under federal or state law.
On behalf of the Division, I appreciate the opportunity to comment on this issue. If you have any questions about this matter, please feel free to contact me.
Dale E. Cantone