Md. Code Regs. 02.02.08.16

Current through Register Vol. 51, No. 24, December 2, 2024

Section 02.02.08.16 - Fraudulent and Prohibited Practices

A. Scope of Antifraud Provisions. Unless otherwise indicated, the antifraud provisions of the Maryland Franchise Law, Business Regulation Article, § 14-229, Annotated Code of Maryland, and this regulation apply to any offer to sell or sale of a franchise in the State regardless of whether the franchise offering is exempt from registration under the Maryland Franchise Law.

B. Fraudulent Representations and Deceptive Statements. A person authorizing, aiding in, or causing to be made an offer or sale of a franchise commits a "misrepresentation to, deceit of, or fraud on the buyer" within the meaning of the Maryland Franchise Law, Business Regulation Article, § 14-221(2), Annotated Code of Maryland, and engages in an "act, practice, or course of business which operates or would operate as a fraud or deceit on another person" within the meaning of the Maryland Franchise Law, Business Regulation Article, § 14-229(a)(3), Annotated Code of Maryland, if that person makes, or causes to be made, oral or written statements that do not comply with §§C-H of this regulation.

C. Representations Concerning Nature of Franchise. A person authorizing, aiding in, or causing to be made an offer or sale of a franchise may not make, or cause to be made, oral or written statements concerning the:

(1) Exclusivity of the franchise rights granted to the franchisee without disclosing the exact nature of the exclusivity;

(2) Nature and number of locations or sites appropriate for the franchisee's enterprise, whether or not to be obtained by the franchisor, without disclosing:

(a) By whom each site is to be secured;

(b) The manner in which the procurement of any site is to be financed;

(c) The source and terms for financing;

(d) The relationship, if any, between site procurement and the execution of a franchise agreement;

(e) The identity of anyone with whom the franchisor has a binding obligation for the procurement of any site;

(f) Whether use of a site by a franchisee will entitle the franchisee to become affiliated with any existing enterprise; and

(g) Whether the use of a site by a franchisee will create an obligation on the part of the franchisor or franchisee to any third party;

(3) Interest or readiness of other persons to enter into a franchise agreement substantially similar to that being offered or sold without disclosing the source of this information and the identities, including names and addresses, of those persons;

(4) Total number of franchises substantially similar to the franchise being offered or sold that have been established or are planned to be established in a geographical area without disclosing:

(a) Graphically, the area represented; and

(b) Whether the subject franchises are operating or have conducted business within the meaning of Item 20 of the MFOC; or

(5) Endorsement or approval of the franchise or its business by any person or entity without disclosing the nature of the endorsement or approval and any compensation by the franchisor or the franchisees to the person or entity.

D. Representations Concerning Income, Earnings, and Net Worth. A person authorizing, aiding in, or causing to be made, an offer or sale of a franchise may not make, or cause to be made, oral or written statements concerning:

(1) Industry-wide total income or the income applicable to the prospective franchisee, whether actual or projected, for a product or service marketed by the franchisor, without disclosing the relationship, if any, of these representations to the franchisor's and its franchisees' actual income experience;

(2) The actual income experience of the franchisor unless the person discloses the availability of certified audited financial statements and how they may be obtained;

(3) Potential earnings from operation of the franchise if these earnings claims have not been included in the MFOC or other offering circular required to be filed with the Commissioner;

(4) The net worth of the franchisor and its affiliates unless the person discloses whether financial statements of the franchisor are available and how they may be obtained; or

(5) The amount or value of revenue, sales, income, contracts, or business intended to be provided to a franchisee within a specified period of time, without disclosing the actual revenue, sales, income, contract, or business experience of existing franchisees purchasing similarly described franchises, and the period of time in which those franchisees achieved and maintained that revenue, sales, income, contracts, or business.

E. Representations Concerning the Operation of the Franchise. A person authorizing, aiding in, or causing to be made an offer or sale of a franchise may not make, or cause to be made, oral or written statements concerning the:

(1) Date by which a prospective franchisee's enterprise will be totally operational without disclosing the:

(a) Factual basis upon which that date has been determined or estimated; and

(b) Average elapsed time between the signing of a franchise contract and the beginning of conduct of business of the franchisor's other franchisees throughout the continental United States and Canada;

(2) Sources from which a franchisee is required to purchase its goods, services, equipment, inventory, or real estate pursuant to the franchise agreement without disclosing:

(a) An affiliation between these sources and the franchisor; and

(b) The relationship between the price at which a franchisee will make the purchases and the prevailing market price, if any, for these goods, services, supplies, equipment, inventory, or real estate;

(3) Franchisor's affiliation with any person or business entity from whom the franchisee shall be required to purchase goods or services or with whom the franchisee shall otherwise be required to do business without disclosing the legal nature of the affiliation; or

(4) Qualifications or experience that the franchisor or any affiliate requires or recommends be possessed by a potential franchisee without disclosing whether additional personnel will be required for operation of the franchisee's business if the potential franchisee does not possess the requisite qualifications or experience.

F. Representations Concerning the Franchise Agreement. A person authorizing, aiding in, or causing to be made an offer or sale of a franchise may not make, or cause to be made, oral or written statements concerning:

(1) The application for a franchise agreement without disclosing that an application is a preliminary document and not the agreement by which a franchise will be sold or the creation of a contractual relationship;

(2) A payment or consideration without disclosing its significance in the franchise sale transaction;

(3) The execution of any contract, release, or any negotiable or other written instrument in connection with the franchise agreement without disclosing the complete contents of the document and the significance of the execution of the document in the franchise sale transaction; or

(4) Recovery of a portion or all of the franchise fee or other investment without disclosing:

(a) Whether the franchise fee or other investment is secured or guaranteed and, if so, in what manner; or

(b) If the franchise fee or other investment is not secured or guaranteed, over what period of time, based on the actual experience of other franchises of the franchisor, the franchisee might expect to recover the franchise fee or other investment.

G. Representations Concerning Franchisor Support. A person authorizing, aiding in, or causing to be made an offer or sale of a franchise may not make, or cause to be made, oral or written statements concerning the:

(1) Advertising support to be provided by the franchisee and by the franchisor without disclosing the manner by which:

(a) The funds are to be raised and spent; and

(b) A franchisee may obtain an accounting of expenditures;

(2) Extent of any training, supervision, and technical assistance to be provided by the franchisor under the franchise agreement without disclosing the:

(a) Frequency with which the training, supervision, and technical assistance will be provided;

(b) Cost of the training, supervision, and technical assistance to the franchisee; and

(c) Effect of any failure of the franchisee to participate in the same; or

(3) Aid or assistance that the franchisor will provide to the franchisee in training, obtaining locations for conducting business, or in marketing the product or service of the franchisor without disclosing, before the execution of the franchise agreement, whether the franchise agreement imposes these obligations on the franchisor.

H. Representations Concerning Public Agencies. A person authorizing, aiding in, or causing to be made an offer or sale of a franchise may not make, or cause to be made, any oral or written statement concerning:

(1) Approval or endorsement of a franchise or a franchisor by the Division of Securities, any other State agency, or any other public agency or the employees of any public agency;

(2) A finding by any agency of any state, or of any public agency, or by its agents or employees that any contents of advertising are true and not misleading; or

(3) The name of the state or any state agency or the name of any public agency or any agency agents or employees in connection with promoting, advertising, offering, or selling a franchise other than to:

(a) State that compliance with applicable laws has been accomplished; and

(b) Demonstrate compliance by a showing of copies of correspondence or official records.

I. Misrepresentations. A person authorizing, aiding in, or causing to be made, an offer or sale of a franchise commits a "misrepresentation to, deceit of, or fraud on the buyer" within the meaning of the Maryland Franchise Law, Business Regulation Article, § 14-221(2), Annotated Code of Maryland, and engages in an "act, practice, or course of business which operates or would operate as a fraud or deceit on another person" within the meaning of the Maryland Franchise Law, Business Regulation Article, § 14-229(a)(3), Annotated Code of Maryland, if that person misrepresents:

(1) That execution of any document in connection with the offer or sale of a franchise constitutes only an application for a franchise if execution of the document creates a contractual relationship;

(2) The number of franchises of the franchisor that are similar in type and which are conducting or have conducted business within the meaning of Item 20 of the MFOC, within a given area at any time;

(3) That the franchise agreement and all of its obligations are embodied in one or several documents presented to, made available to, or executed by a prospective franchisee when, in fact:

(a) The execution of additional documents, or the giving by the franchisee of additional consideration, is required for the creation of a contractual relationship, or

(b) The execution of one or more of these documents is not related to or necessary for the sale of the franchise;

(4) Any element of a franchise agreement or of the business of the franchisor that is required to be disclosed by the Maryland Franchise Law, Business Regulation Article, § 14-216, Annotated Code of Maryland, or by this regulation.

J. False, Fraudulent, and Deceptive Omissions. A person authorizing, aiding in, or causing to be made an offer or sale of a franchise commits a "misrepresentation to, deceit of, or fraud on the buyer" within the meaning of the Maryland Franchise Law, Business Regulation Article, § 14-221(2), Annotated Code of Maryland, and engages in an "act, practice, or course of business which operates or would operate as a fraud or deceit on another person" within the meaning of the Maryland Franchise Law, Business Regulation Article, § 14-229(a)(3), Annotated Code of Maryland, if that persons fails to make the following disclosures:

(1) When a relationship exists between the franchisor and any other person or entity that has offered, is offering, or will offer a franchise program substantially similar to that being offered or sold, to disclose the:

(a) Nature of the relationship; and

(b) Similarity, if any, between the trademark or commercial symbol or the production and marketing plan of the other person or entity to that of the franchise being offered or sold;

(2) If a franchisee is required to purchase goods, services, equipment, inventory, real estate, or other items from designated sources, including the franchisor, to disclose:

(a) In the case of sources other than the franchisor, any affiliation of the franchisor with these sources;

(b) If the source is affiliated with the franchisor, the cost to the seller of these goods, services, equipment, inventory, real estate, or other items;

(c) The prevailing market price, if any, for the goods, services, equipment, inventory, real estate, or other items, and if none, an explanation as to the inability of the seller to determine and disclose same; or

(d) The manner, if any, in which the availability of the goods, services, equipment, inventory, real estate, or other items will be insured by the franchisor or its affiliates under the terms of the franchise agreement; or

(3) Any representation required to be made by the Maryland Franchise Law, Business Regulation Article, § 14-216, Annotated Code of Maryland, which is an element of the franchise being offered or sold.

K. Misapplication of Proceeds. A person authorizing, aiding in, or causing to be made an offer or sale of a franchise commits a "misrepresentation to, deceit of, or fraud on the buyer" within the meaning of the Maryland Franchise Law, Business Regulation Article, § 14-221(2), Annotated Code of Maryland, and engages in an "act, practice, or course of business which operates or would operate as a fraud or deceit on another person" within the meaning of the Maryland Franchise Law, Business Regulation Article, § 14-229(a)(3), Annotated Code of Maryland, if that person applies, authorizes, or causes any material part of the proceeds from the sale of franchises to be applied:

(1) In any material way contrary to the purpose specified in the offering circular, advertising, or oral representations used in connection with the offer or sale of the franchise; or

(2) For a purpose not reasonably related to the business of the franchisor as described in the offering circular, advertising, oral representations, or any contract related to the offer or sale of the franchise.

L. Prohibited Releases from Liability and Waivers. A person authorizing, aiding in, or causing to be made, an offer or sale of a franchise commits a "misrepresentation to, deceit of, or fraud on the buyer" within the meaning of the Maryland Franchise Law, Business Regulation Article, § 14-221(2), Annotated Code of Maryland, and engages in an "act, practice, or course of business which operates or would operate as a fraud or deceit on another person" within the meaning of the Maryland Franchise Law, Business Regulation Article, § 14-229(a)(3), Annotated Code of Maryland, if that person requires a franchisee to:

(1) Provide a release from liability under the provisions of the Maryland Franchise Law as part of a franchise agreement or as a condition of the sale, renewal, or assignment of a franchise;

(2) Assent to a period of limitations for causes of action under the Maryland Franchise Law, Business Regulation Article, § 14-226, Annotated Code of Maryland, other than the period of limitations set forth in that statute; or

(3) Waive the franchisee's right to file a lawsuit alleging a cause of action arising under the Maryland Franchise Law in any court of competent jurisdiction in this State.

Md. Code Regs. 02.02.08.16

Regulations .16 adopted effective January 17, 1994 (21:1 Md. R. 27)