ENTITLED, An Act to
revise certain provisions regarding the regulation of franchises and business
opportunities.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF SOUTH DAKOTA:
Section 1.
Terms used in this Act, unless the context otherwise requires, mean:
(1) "Action," any complaint, cross claim, counterclaim, and third-party complaint in a judicial
action or proceeding, and their equivalent in an administrative action or arbitration;
(2) "Affiliate," any entity controlled by, controlling, or under common control with another
entity;
(3) "Confidentiality clause," any contract, order, or settlement provision that directly or
indirectly restricts a current or former franchisee from discussing the franchisee's personal
experience as a franchisee in the franchisor's system with any prospective franchisee. The
term does not include any clause that protects franchisor's trademarks or other proprietary
information;
(4) "Director," the director of the Division of Securities;
(5) "Disclosure document," the Federal Trade Commission franchise disclosure document as
set forth pursuant to 16 C.F.R. Part 436, as of January 1, 2008;
(6) "Disclose, state, describe, and list," to present all material facts accurately, clearly,
concisely, and legibly in plain English;
(7) "Filing, filed," the receipt pursuant to this Act of a record by the director;
(8) "Financial performance representation," any representation, including any oral, written,
or visual representation, to a prospective franchisee, including a representation in the
general media, that states, expressly or by implication, a specific level or range of actual
or potential sales, income, gross profits, or net profits. The term includes any chart, table,
or mathematical calculation that shows possible results based on a combination of
variables;
(9) "Fiscal year," the franchisor's fiscal year;
(10) "Fractional franchise," any franchise relationship that satisfies the following criteria when
the relationship is created:
(a) The franchisee, or any of the franchisee's current directors or officers, or any
current directors or officers of a parent or affiliate, has more than two years of
experience in the same type of business; and
(b) The parties have a reasonable basis to anticipate that the sales arising from the
relationship will not exceed twenty percent of the franchisee's total dollar volume
in sales during the first year of operation;
(11) "Franchise," any continuing commercial relationship or arrangement, whatever it may be
called, in which the terms of the offer or contract specify, or the franchise seller promises
or represents, orally or in writing, that:
(a) The franchisee will obtain the right to operate a business that is identified or
associated with the franchisor's trademark, or to offer, sell, or distribute goods,
services, or commodities that are identified or associated with the franchisor's
trademark;
(b) The franchisor will exert or has authority to exert a significant degree of control
over the franchisee's method of operation, or provide significant assistance in the
franchisee's method of operation; and
(c) As a condition of obtaining or commencing operation of the franchise, the
franchisee makes a required payment or commits to make a required payment to
the franchisor or its affiliate;
(12) "Franchisee," any person who is granted a franchise;
(13) "Franchise seller," any person that offers for sale, sells, or arranges for the sale of a
franchise. The term includes the franchisor and the franchisor's employees,
representatives, agents, subfranchisors, and third-party brokers who are involved in
franchise sales activities. The term does not include existing franchisees who sell only
their own outlet and who are otherwise not engaged in franchise sales on behalf of the
franchisor;
(14) "Franchisor," any person who grants a franchise and participates in the franchise
relationship. Unless otherwise stated, the term includes subfranchisors. For purposes of
this subdivision, a subfranchisor is any person who functions as a franchisor by engaging
in both pre-sale activities and post-sale performance;
(15) "Leased department," any arrangement whereby a retailer licenses or otherwise permits
a seller to conduct business from the retailer's location where the seller purchases no
goods, services, or commodities directly or indirectly from the retailer, a person the
retailer requires the seller to do business with, or a retailer-affiliate if the retailer advises
the seller to do business with the affiliate;
(16) "Offer," any attempt to dispose of, and any solicitation of an offer to buy, a franchise or
interest in a franchise for value by purchase, license, or otherwise. The term does not
include an offer to extend or renew an existing franchise if there is no interruption in the
franchisee's operation of the business, unless the terms and conditions of the extension or
renewal differ materially from the original agreement. The term also does not include an
offer of a franchise by an existing franchisee if the franchisor has had no significant
involvement with the prospective franchisee. A franchisor's prior dealing with a
prospective franchisee alone is not deemed to be significant involvement;
(17) "Order," any consent, authorization, approval, prohibition or requirement, or other order
applicable to a specific case, issued by the director;
(18) "Notice filing application," the form adopted by the director and used to make notice
filings of franchises;
(19) "Parent," an entity that controls another entity directly, or indirectly through one or more
subsidiaries;
(20) "Person," any individual, group, association, limited or general partnership, corporation,
limited liability company, or any other entity;
(21) "Plain English," the organization of information and language usage understandable by
a person unfamiliar with the franchise business. The term incorporates short sentences;
definite, concrete, everyday language; active voice; and tabular presentation of
information, whenever possible. The term avoids legal jargon, highly technical business
terms, and multiple negatives;
(22) "Predecessor," any person from whom the franchisor acquired, directly or indirectly, the
major portion of the franchisor's assets;
(23) "Principal business address," the street address of a person's home office in the United
States. The term does not include a post office box or private mail drop;
(24) "Prospective franchisee," any person (including any agent, representative, or employee)
who approaches or is approached by a franchise seller to discuss the possible
establishment of a franchise relationship;
(25 ) "Record," information that is inscribed on a tangible medium or that is stored in an
electronic or other medium and is retrievable in perceivable form;
(26) "Required payment," any consideration that the franchisee must pay to the franchisor or
an affiliate, either by contract or by practical necessity, as a condition of obtaining or
commencing operation of the franchise. The term does not include any payment for the
purchase of reasonable amounts of inventory at bona fide wholesale prices for resale or
lease;
(27) "Rule," any rule promulgated by the director in accordance with chapter 1-26;
(28) "Sale of a franchise," any agreement whereby a person obtains a franchise from a
franchise seller for value by purchase, license, or otherwise. The term does not include
extending or renewing an existing franchise agreement if there has been no interruption
in the franchisee's operation of the business, unless the new agreement contains terms and
conditions that differ materially from the original agreement. The term also does not
include the transfer of a franchise by an existing franchisee if the franchisor has had no
significant involvement with the prospective transferee. A franchisor's approval or
disapproval of a transfer alone is not deemed to be significant involvement;
(29) "Signature," a person's affirmative method of authenticating his or her identity. The term
includes a person's handwritten signature, as well as a person's use of security codes,
passwords, electronic signatures, and similar devices to authenticate his or her identity;
(30) "Trademark," any trademark, service mark, name, logo, and other commercial symbol;
(31) "Willfully," if applied to the intent with which an act is done or omitted, implies simply
a purpose or willingness to commit the act, or make the omission referred to. The term
does not require any intent to violate law, or to injure another, or to acquire any
advantage;
(32) "Written or in writing," any document or information in printed form or in any form
capable of being preserved in tangible form and read. The term includes: type-set, word
processed, or handwritten document; information on computer disk or CD-ROM;
information sent via email; or information posted on the internet. The term does not
include mere oral statements.
Section 2.
This Act applies to any franchise that is offered or sold in this state. A franchise is
offered in this state if:
(1) An offer to sell is made in this state;
(2) The offer originates from within this state; or
(3) The offer is directed by the offeror into this state from outside this state and is received
where directed.
A franchise is sold in this state if the offer to sell is accepted in this state.
A franchise is offered or sold in this state if the franchise is offered or sold to a resident of this
state and the franchise is to be operated in this state, or, if the franchisee is domiciled in this state
when the franchised business is or will be operated in this state.
Section 3.
An offer to sell is not made in this state solely because the offer appears in a
newspaper or other publication of general and regular circulation which had more than two-thirds
of its circulation outside this state during the past twelve months or solely because the offer appears
in a broadcast or transmission originating outside this state.
An offer to sell or to purchase is not made in this state if the offer to sell is made over the internet
or similar proprietary or common carrier electronic system if the following conditions are met:
(1) The internet offer indicates that the franchise is not being offered to residents of South
Dakota;
(2) The internet offer is not directed to any person in South Dakota by or on behalf of the
franchisor or anyone acting with the franchisor's knowledge; and
(3) No franchise is sold in South Dakota by or on behalf of the franchisor until the offering
has been filed by notice and the franchise disclosure document has been delivered to the
purchaser prior to the sale and in compliance with this Act.
An offer or sale of a franchise is not made in this state if the offer or sale is made to a person not
a resident of this state, if the franchise will not be located in this state, and if the offer or sale does
not constitute a violation of the laws of the state or foreign jurisdiction in which the offeree or
purchaser is present and is not part of an unlawful attempt to evade this Act.
Section 4.
It is unlawful for any person to offer or sell a franchise in this state unless the franchise
has properly notice filed under this Act or is exempt from notice filing pursuant to sections 12 to 15,
inclusive, of this Act.
Section 5.
An initial application for the notice filing of a franchise shall be made by filing with
the director of the Division of Securities a franchise notice filing application and one clean copy of
the disclosure document and consent to service of process, accompanied by a fee of two hundred
fifty dollars.
If after considering identified conditions and events and management's plans, the auditor
concludes that there is substantial doubt about the franchisor's ability to continue as a going concern
for a reasonable period of time, the director shall be notified by separate letter as to the going
concern issue with the notice filing application.
After a notice filing becomes effective, the applicant has a continuing obligation to notify the
director of a going concern within fifteen days after the auditor concludes there is a going concern.
Except as otherwise provided in this section, if no order or injunction pursuant to section 41 or
48 of this Act is in effect, and the filing is complete as required by this section, a notice filing is
effective upon receipt by the director.
If the director requires the submission of additional information pursuant to section 6 or 36 of
this Act, and if no order or injunction pursuant to section 41 or 48 of this Act is in effect, the notice
filing becomes effective on the fifteenth business day after the additional information is filed with
and approved by the director, or at such earlier time as the director determines, unless the applicant
requests postponement of the effectiveness of the notice filing. Business day means any day on
which state offices are open for regular business.
The notice filing of a franchise under this Act expires one year following the date of receipt of
the initial application, unless the director prescribes a different period by rule or order. A notice
filing may be renewed for one year or a shorter period if designated by the director by filing an
application to renew in the same manner as set forth in this section, except that the renewal fee is one
hundred fifty dollars. Any filing received after the expiration date shall be treated as an initial filing
subject to a filing fee of two hundred fifty dollars.
An applicant may withdraw a notice filing if the applicant files a written request for withdrawal
with the director. Withdrawal is effective fifteen days from the day on which the withdrawal request
is filed unless a shorter period is designated by the director.
The director may by rule or order construe any public offering, disclosure document, or similar
statement which complies with the requirements of any federal law or administrative rule or with the
law of any other state requiring substantially the same disclosure of information as is required by this
Act to be in full or partial compliance with this section.
The director may by rule or order provide that any information required in the disclosure
document need not be included by any class of franchisors if the director finds that the information
is inappropriate to the class and that disclosure adequate for the protection of prospective franchisees
is otherwise included within the disclosure document.
The director may accept any disclosure document or other document filed with the director in
an electronic format that is readily accessible by the Division of Securities' then existing electronic
systems and in a format that can be downloaded, printed, or otherwise maintained as a record for
future reference. If the director accepts electronic filings, the director shall publish a notice on the
division's website stating the acceptance of electronic filing and the electronic format to be used.
If the franchisor is unable to demonstrate to the director the franchisor's financial ability to fulfill
its initial obligations to franchisees, the director may require an escrow of funds paid by the
franchisee to the franchisor or its affiliate until the franchisor performs its initial obligations and the
franchisee has commenced operations. The director may allow alternatives to escrow depending
upon the various facts presented on a case by case basis.
Section 6.
The director may require the franchisor to alter or amend the proposed disclosure
document in order to assure full and fair disclosure to prospective purchasers.
Section 7.
There is no filing required with the division for updating disclosure documents; but
disclosure information shall be updated as follows:
(1) Any information in the disclosure document shall be current as of the close of the
franchisor's most recent fiscal year. After the close of the fiscal year, the franchisor shall,
within one hundred twenty days, prepare a revised disclosure document, after which a
franchise seller may distribute only the revised document and no other disclosure
document;
(2) The franchisor shall, within a reasonable time after the close of each quarter of the fiscal
year, prepare revisions to be attached to the disclosure document to reflect any material
change to the disclosures included, or required to be included, in the disclosure document.
Each prospective franchisee shall receive the disclosure document and the quarterly
revisions for the most recent period available at the time of disclosure;
(3) If applicable, the annual update shall include the franchisor's first quarterly update, either
by incorporating the quarterly update information into the disclosure document itself, or
through an addendum;
(4) When furnishing a disclosure document, the franchise seller shall notify the prospective
franchisee of any material changes that the seller knows or should have known occurred
in the information contained in any financial performance presentation; and
(5) Information that must be audited pursuant to the disclosure requirements need not be
audited for quarterly revisions if the franchisor states in immediate conjunction with the
information that the information was not audited.
Section 8.
For the purposes of section 7 of this Act, a start-up franchise system that does not yet
have audited financial statements, may phase-in the use of audited financial statements by providing,
at a minimum, the following statements in the times indicated below:
(1) The franchisor's first partial or full fiscal year selling franchises: an unaudited opening
balance sheet;
(2) The franchisor's second fiscal year selling franchises: audited balance sheet opinion as of
the end of the first partial or full fiscal year selling franchises; and
(3) The franchisor's third and subsequent fiscal years selling franchises: all required financial
statements for the previous fiscal year, plus any previously disclosed audited statements
that still must be disclosed such as the franchisor's balance sheet for the previous two
fiscal year-ends before the disclosure document issuance date and statements of
operations, stockholders equity, and cash flows for each of the franchisor's previous three
fiscal years.
Section 9.
For the purposes of section 7 of this Act, a start-up franchisor may phase-in the
disclosure of audited financial statements, if the franchisor:
(1) Prepares audited financial statements as soon as practicable;
(2) Prepares unaudited statements in a format that conforms as closely as possible to audited
statements; and
(3) Includes one or more years of unaudited financial statements or clearly and conspicuously
discloses in the disclosure document that the franchisor has not been in business for three
years or more, and cannot include all of the financial statements required in the disclosure
document such as the franchisor's balance sheet for the previous two fiscal year-ends
before the disclosure document issuance date and statements of operations, stockholders
equity, and cash flows for each of the franchisor's previous three fiscal years.
Section 10.
This Act does not prevent the negotiation of the terms and conditions of a franchise
before it is sold. After the initial offer, a franchisor need not amend its disclosure document to
negotiate with an offeree, or make supplementary disclosure to that offeree, by reason of a change
negotiated in the terms and conditions of a franchise.
Section 11.
The person offering or selling any franchise subject to the requirements of sections
17 and 18 of this Act shall obtain a receipt, signed by the prospective franchisee, acknowledging that
the prospective franchisee has received a copy of the disclosure document prior to the prospective
franchisee affixing a signature to any franchise or other agreement and prior to the payment of any
consideration by the prospective franchisee. The receipt shall be kept in the possession of the
franchise seller, subject to inspection by the director, for a period of three years from the date the
receipt is taken.
Section 12.
The following are exempt from this Act:
(1) Any franchise relationship covered by the Petroleum Marketing Practices Act, 15 U.S.C.
2801, as of January 1, 2008;
(2) Any franchise relationship where there is no written document that describes any material
term or aspect of the relationship or arrangement;
(3) Any fractional franchise;
(4) Any leased department;
(5) The total of the required payments, or commitments to make a required payment, to the
franchisor or an affiliate that are made any time from before to within six months after
commencing operation of the franchisee's business is less than five hundred dollars;
(6) Any franchise relationship covering farm machinery, motor vehicles, or recreational
vehicles, including snowmobiles, motorcycles, motor homes, mobile homes, and
manufactured homes.
Section 13.
The following franchises are subject to this Act but are exempt from sections 4 and
17 of this Act, if any of the following conditions are satisfied:
(1) The franchisee's initial investment, excluding any financing received from the franchisor
or an affiliate, and excluding the cost of unimproved land, totals at least one million
dollars and the prospective franchisee signs an acknowledgment verifying the grounds for
the exemption. The acknowledgment shall state: The franchise sale is for more than one
million dollars, excluding the cost of unimproved land and any financing received from
the franchisor or an affiliate;
(2) The franchisee (or its parent or any affiliates) is an entity that has been in business for at
least five years and has a net worth of at least five million dollars; or
(3) The offer or sale of a franchise by an executor, administrator, sheriff, marshal, receiver,
trustee, trustee in bankruptcy, guardian, or conservator on behalf of a person other than
the franchisor or the estate of the franchisor; or
(4) One or more purchasers of at least a fifty percent ownership interest in the franchise;
within sixty days of the sale, has been, for at least two years, an officer, director, general
partner, individual with management responsibility for the offer and sale of the
franchisor's franchises or the administrator of the franchised network; or within sixty days
of the sale, has been, for at least two years, an owner of at least a twenty-five percent
interest in the franchise.
Section 14.
The following franchises are subject to this Act but are exempt from section 4 of this
Act if any of the following conditions are satisfied:
(1) The offer or sale to an existing franchisee of an additional franchise that is substantially
the same as the franchise that the franchisee has operated for at least two years at the time
of the offer or sale; or
(2) The offer or sale of a franchise to a bank, saving and loan association, financial
organization or life insurance corporation within the meanings given these terms by
chapters 43-41B, 52-1, and 58-1.
Section 15.
The director may by rule or order exclude the offer and sale of a franchise from the
requirements of sections 4 and 17 of this Act if the filing or disclosure is not necessary or appropriate
in the public interest or for the protection of prospective franchisees.
Section 16.
For purposes of the exemptions set forth in subdivision (5) of section 12 of this Act
and subdivisions (1) and (2) of section 13 of this Act, the director may adjust by rule or order the size
of the thresholds.
Section 17.
In connection with the offer or sale of a franchise in this state, unless the transaction
is exempted by the provisions of sections 12 to 16, inclusive, of this Act, it is a prohibited practice
and a violation of this Act for any person, directly or indirectly, to:
(1) Fail to furnish a prospective franchisee with a copy of the franchisor's current disclosure
document at least fourteen calendar-days before the prospective franchisee signs a binding
agreement with, or makes any payment to, the franchisor or an affiliate in connection with
the proposed franchise sale;
(2) Alter unilaterally and materially the terms and conditions of the basic franchise agreement
or any related agreements attached to the disclosure document without furnishing the
prospective franchisee with a copy of each revised agreement at least seven calendar-days
before the prospective franchisee signs the revised agreement. Any change to an
agreement that arises out of negotiations initiated by the prospective franchisee does not
trigger this seven calendar-day period; or
(3) Fail to include all of the information required in the disclosure document if preparing the
disclosure document to be furnished to a prospective franchisee. A franchise seller is
liable for a violation of this subdivision if the seller either directly participated in the
preparation of the disclosure document or had the authority to control those who did.
Section 18.
For purposes of subdivision (1) and (2) of section 17 of this Act, the franchisor has
furnished the disclosure documents by the required date if:
(1) A copy of the disclosure document was hand-delivered, faxed, e-mailed, or otherwise
delivered to the prospective franchisee by the required date;
(2) Directions for accessing the disclosure document on the internet were provided to the
prospective franchisee by the required date; or
(3) A paper or tangible electronic copy was sent to the address specified by the prospective
franchisee by first-class United States mail at least three days before the required date.
Section 19.
Every franchisor offering or selling a franchise in this state shall maintain complete
and accurate books and records of the offers and sales of franchises. The books and records shall
include all of the disclosure documents and advertising and correspondence that have been used with
franchisees and prospective franchisees including past and present operations manuals, training
records, training manuals, copies of executed agreements, and any due diligence records concerning
franchisees. The books and records shall be maintained at an office readily accessible to the
franchisor for three years. The books and records may be kept on photographic or electronic media
but shall be printed if the director requests.
Section 20.
In any proceeding under this Act the burden of proving an exemption is upon the
person claiming it.
Section 21.
A written provision in a franchise contract evidencing a transaction involving
commerce to settle by arbitration a controversy thereafter arising out of the contract or transaction,
or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to
arbitration an existing controversy arising out of the contract, transaction, or refusal, is valid,
irrevocable, and enforceable except upon such grounds as exist at law or in equity for the revocation
of any contract. However, any condition, stipulation, or provision requiring a franchisee to waive
compliance with or relieving a person of a duty or liability imposed by or a right provided by this
Act or a rule or order under this Act is void.
Section 22.
Each applicant for notice filing under this Act, and each franchisor on whose behalf
an application for notice filing is filed, except any applicant and franchisor which are domestic South
Dakota entities, shall file with the director an irrevocable consent to service of process.
The irrevocable consent to service shall be in such form as the director may prescribe. The
irrevocable consent to service of process shall appoint the director to be the applicant's or
franchisor's agent to receive service of any lawful process in any civil action against the applicant
or franchisor or their successor, executor, or administrator, which arises under this Act or any rule
or order thereunder.
After the irrevocable consent to service of process has been filed, it has the same force and
validity as if served personally on the applicant or franchisor or their successor, executor, or
administrator.
If any person, including any nonresident of this state and any foreign corporation, or other entity
engages in conduct prohibited or made actionable by this Act, whether or not they have filed a
consent to service of process pursuant to this section, and personal jurisdiction over them cannot
otherwise be obtained in this state, that conduct shall be considered equivalent to their appointment
of the director to be their agent to receive service of any lawful process in any suit against them or
their successors, executor, or administrator which grows out of that conduct and which is brought
under this Act, with the same force and validity as if served on them personally.
If, under this section, the director is an agent to receive process, service may be made by leaving
a copy of the process in the office of the director as follows:
(1) The process is not effective unless the plaintiff, who may be the director in an action
instituted by the director, forthwith sends notice of the service and a copy of the process
by certified mail to the defendant, or forthwith sends notice of the service and a copy of
the process to the respondent at their last known address on file with the director; and
(2) The plaintiff's affidavit of compliance with this section is filed with the court at the time
as the filing of the complaint.
Section 23.
No person may publish or cause to be published in this state any advertisement
concerning any franchise after the director has found that the advertisement contains any statement
that is false or misleading or omits to make any statement necessary in order to make the statements
made, in light of the circumstances under which they were made, not misleading, and has so notified
the person by written order. The director may issue an order without prior notice or hearing.
After the issuance of an order, the person desiring to use the advertisement may, in writing,
request a hearing on the order. Upon the receipt of the written request, the director shall set a hearing
to commence within fifteen days after the receipt of the request unless the person making the request
consents to a later date. After the hearing, which shall be conducted in accordance with chapter 1-26,
the director shall, by written order, either affirm, modify, or vacate the order.
Unless the director requests the filing of an advertisement, there is no requirement to file
advertising with the division.
Section 24.
No person may, directly or indirectly, employ a device, scheme, or artifice to defraud
in connection with the offer or sale of a franchise. A violation of this section is a fraudulent practice
and a Class 4 felony.
Section 25.
No person may, directly or indirectly, in connection with the offer or sale of a
franchise willfully:
(1) Make an untrue statement of material fact or omit to state a material fact necessary in
order to make the statements made, in the light of the circumstances under which they are
made, not misleading;
(2) Engage in an act, practice, or course of business which operates or would operate as a
fraud or deceit on a person;
(3) Represent to a prospective franchisee that the notice filing of a franchise application
constitutes a finding by the director that a disclosure document filed under this Act is true,
complete, and not misleading or that the director has passed upon the merits of the
disclosure document and the franchise;
(4) Violate an order of the director after the person receives notice that the order was issued;
(5) Misrepresent that a franchise is notice filed or exempted from notice filing under this Act;
and
(6) Omit to state a material fact or make or cause to be made an untrue statement of a material
fact in any application, notice, or report filed with the director under this Act.
A violation of this section is a Class 6 felony.
Section 26.
No person may, directly or indirectly, in connection with the offer or sale of a
franchise:
(1) Make any claim or representation, orally, visually, or in writing, that contradicts the
information required to be in the disclosure document;
(2) Misrepresent that any person:
(a) Purchased a franchise from the franchisor or operated a franchise of the type
offered by the franchisor; or
(b) Can provide an independent and reliable report about the franchise or the
experiences of any current or former franchisees;
(3) Disseminate any financial performance representations to prospective franchisees unless
the franchisor has a reasonable basis and written substantiation for the representation at
the time the representation is made, and the representation is included in the franchisor's
disclosure document and the franchise seller:
(a) Discloses the dates when the reported level of financial performance was achieved
and of those outlets whose data were used in arriving at the representation, and the
number and percent that actually attained or surpassed the stated results if the
representation relates to the past performance of the franchisor's outlets; and
(b) Includes a clear and conspicuous admonition that a new franchisee's individual
financial results may differ from the result stated in the financial performance
representation;
(4) Fail to make available to prospective franchisees, and to the director upon reasonable
request, written substantiation for any financial performance representations made in the
disclosure document;
(5) Fail to furnish a copy of the franchisor's disclosure document to a prospective franchisee
earlier in the sales process than required by section 17 of this Act, upon reasonable
request;
(6) Fail to furnish a copy of the franchisor's most recent disclosure document and any
quarterly updates to a prospective franchisee, upon reasonable request, before the
prospective franchisee signs a franchise agreement;
(7) Present for signing a franchise agreement in which the terms and conditions differ
materially from those presented as an attachment to the disclosure document, unless the
franchise seller informed the prospective franchisee of the differences at least seven days
before execution of the franchise agreement;
(8) Disclaim or require a prospective franchisee to waive reliance on any representation made
in the disclosure document or in its exhibits or amendments. However, this provision is
not intended to prevent a prospective franchisee from voluntarily waiving specific
contractual terms and conditions set forth in his or her disclosure document during the
course of franchise sale negotiations; and
(9) Fail to return any funds or deposits in accordance with any conditions disclosed in the
franchisor's disclosure document, franchise agreement, or any related document.
Section 27.
The director may not approve or express any opinion on the legality of any matter
a franchisor may be required to disclose under this Act.
Section 28.
The director shall administer this Act.
Section 29.
The director may promulgate rules pursuant to chapter 1-26 to carry out the
provisions of this Act including forms governing disclosure documents, applications, financial
statements, and defining any terms, whether or not used in this Act, if the definitions are not
inconsistent with this Act. For the purpose of rules the director may classify franchises, persons and
matters within the director's jurisdiction, and prescribe different requirements for different classes.
Section 30.
The director may, upon request and upon payment of a fee of fifty dollars, respond
to requests for interpretive opinions relating to this Act.
Section 31.
A document is filed when it is received by the director.
Section 32.
The director shall maintain a record which shows the notice filed franchise and for
whom filed, and shall specify the conditions, limitations, and restrictions upon the filing, if any, or
shall make proper reference to a formal order of the director on file showing the conditions,
limitations, and restrictions.
Section 33.
Each application, notice and report filed with the director under this Act is open to
public inspection in accordance with rules prescribed by the director. The director may publish
information filed with the director or obtained by the director, if, in the judgment of the director,
such action is in the public interest.
No record obtained by the director pursuant to section 35 of this Act is open to public inspection.
Section 34.
The director shall upon request furnish copies to any person, at a reasonable charge,
certified under the director's seal of office if certification is requested, of any notice filing,
application and order on file in the director's office. Any copy so certified is admissible in evidence
under chapter 19-4.
Section 35.
The director may make such public or private investigations within or outside of this
state as the director deems necessary to determine if any person has violated or is about to violate
any rule, order, or provision under this Act or to aid in the enforcement of this Act and in the
prescribing of rules and forms under this Act. The director may publish information concerning the
violation of any rule, order, or provision under this Act.
Section 36.
The director may make a written request to any person for information concerning
any investigation being conducted by the director. Failure to respond fully and completely to such
a request within fifteen days after receipt thereof constitutes cause for the issuance of a cease and
desist order.
Section 37.
For the purpose of any investigation or proceeding under this Act, the director or any
person designated by the director may administer oaths and affirmations, subpoena witnesses and
compel their attendance, take evidence and require the production of any books, papers,
correspondence, memoranda, agreements, or other documents or records which the director deems
relevant or material to the inquiry.
Any order of the director shall be served by mailing a copy thereof by certified mail to the most
recent address of the recipient of the order as it appears in the files of the director. Any subpoena
shall be served in the same manner as provided in civil actions in circuit court.
No provision of this Act either creates any privilege or derogates from any privilege which exists
at common law or otherwise, if documentary or other evidence is sought under a subpoena directed
to the director or any of the director's officers or employees.
If any person refuses to obey a subpoena, the circuit court, upon application by the director, may
issue an order directing the person to appear before the director, or the officer designated by the
director, to produce documentary evidence if so ordered, or to give evidence on the matter under
investigation or in question. Failure to obey the order of the court is punishable by the court as a
contempt of court.
Section 38.
No person is excused from attending and testifying or from producing any document
or record before the director, in obedience to a subpoena of the director or any person designated by
the director in any proceeding instituted by the director, on the grounds that the testimony or
evidence required of the director may tend to incriminate the person or subject the person to a
penalty or forfeiture. No person may be prosecuted or subjected to any penalty or forfeiture on
account of any transaction, matter, or thing concerning which the person is compelled, after claiming
the privilege against self-incrimination, to testify or produce evidence. However, the person
testifying is not exempt from prosecution and punishment for perjury or contempt committed in
testifying.
Section 39.
It is a Class 2 misdemeanor for the director or any of the director's officers or
employees to use for personal benefit any information which is filed with or obtained by the director
and which is not generally available to the public. Nothing in this Act authorizes the director or any
of the director's officers or employees to disclose any confidential information except among
themselves or to other administrators or regulatory authorities or if necessary or appropriate in a
proceeding or investigation under this Act.
Section 40.
To encourage uniformity in franchise matters among the federal government,
self-regulatory organizations, states and foreign governments, the director may cooperate with
federal, state or foreign agencies or administrators and law enforcement agencies, including:
(1) Conducting joint examinations and investigations;
(2) Holding joint administrative hearings;
(3) Filing and prosecuting joint civil or administrative proceedings;
(4) Sharing and exchanging information and documents;
(5) Sharing and exchanging personnel;
(6) Formulating statutes, rules, regulations, statements of policy, guidelines, proposed
statutory changes and interpretive opinions and releases; and
(7) Issuing and enforcing subpoenas at the request of the Federal Trade Commission or an
agency administering franchise statutes in another jurisdiction if the information sought
would also be subject to lawful subpoena for conduct occurring in this state.
Section 41.
The director, with or without prior notice or hearing, may issue a cease and desist
order and may issue an order denying, suspending, or revoking any notice filing, amendment, or
exemption if the director finds:
(1) That the applicant, or franchisor or any officer, director, agent, or employee thereof or any
other person has violated or failed to comply with any provision of this Act or any rule
or order of the director;
(2) That the offer, sale, or purchase of the franchise would constitute misrepresentation to,
or deceit or fraud upon, purchasers thereof, or has worked or tended to work a fraud upon
purchasers or would so operate;
(3) That the applicant, or franchisor or any officer, director, agent, or employee thereof or any
other person is engaging or is about to engage in false, fraudulent, or deceptive practices
in connection with the offer and sale of a franchise;
(4) That any person identified in the disclosure document has been convicted of or had a civil
judgment entered against him or her for fraud, theft, fraudulent conversion, restraint of
trade, unfair or deceptive practices or misappropriation of property, or is subject to an
order issued, after notice and opportunity for hearing, by a state or federal regulatory
agency and the involvement of the person in the business of the applicant or franchisor
creates a substantial risk to prospective franchisees;
(5) That the financial condition of the franchisor adversely affects or would adversely affect
the ability of the franchisor to fulfill its obligations under the franchise agreement; or
(6) That the franchisor's enterprise or method of business includes or would include activities
which are illegal where performed.
Section 42.
As an alternative to the procedure prescribed in section 41of this Act, the director
may issue an order to show cause setting a hearing and requiring an applicant, notice filer, franchisor,
or other person to appear and show cause why a cease and desist order should not be issued, or why
an order denying, suspending, or revoking a notice filing, amendment, or exemption should not be
issued. The order shall give reasonable notice of the time and place for hearing, and shall state the
reasons for the entry of the order. The hearing shall be conducted in accordance with chapter 1-26.
After the hearing, the director shall enter an order making such disposition of the matter as the facts
require.
Section 43.
The director may impose a civil penalty against a person named in an order issued
pursuant to subdivisions (1) to (3), inclusive, and subdivision (6) of section 41of this Act. The
amount of the civil penalty may not exceed five thousand dollars for each act or omission that
constitutes the basis for issuing the order. The civil penalty may only be imposed:
(1) Following an opportunity for a hearing pursuant to section 44 of this Act if the notice
delivered to all named persons includes notice of the director's authority to impose a civil
penalty under this section; or
(2) As part of an order issued pursuant to subdivisions (1) to (3), inclusive and subdivision
(6) of section 41 of this Act, if the order is stipulated to by each person subject to the civil
penalty.
Any civil penalty collected pursuant to this section shall be deposited into the state general fund.
Section 44.
Upon the entry of an order pursuant to section 41 of this Act without a hearing, the
director of the Division of Securities shall promptly serve a copy of the order upon the subject
applicant, franchisor, or other person. The order shall state the reasons for its issuance and shall
either order a hearing, which shall be set for no later than twenty days from the date of the order, or
specify that upon the written request of the applicant, franchisor, or other person, the matter will be
set for hearing within fifteen days after receipt of the request. With the consent of the applicant,
franchisor, or other person a hearing may be held subsequent to the expiration of either period
specified in this section. On all orders of the director which do not fix the date for hearing, the
interested person may within thirty days demand a hearing on the order.
Section 45.
If no hearing is requested and none is ordered by the director, an order entered
pursuant to section 41 of this Act without a hearing shall remain in effect until it is modified or
vacated by the director.
Section 46.
If a hearing is requested or ordered, the director, after notice and hearing held in
accordance with chapter 1-26 shall affirm, modify, or vacate the order.
Section 47.
If the director has reasonable cause to believe that any person has engaged or is about
to engage in any act or practice constituting a violation of any provision of this Act or any rule or
order thereunder, the director may, in addition to all other remedies, through the attorney general,
with such assistance as the attorney general may request of the state's attorneys in the several
counties, institute a civil action pursuant to section 49 of this Act.
Section 48.
In addition to all other penalties and remedies provided by this Act, whether
administrative or judicial in nature, the courts of this state have jurisdiction to grant such temporary
or permanent injunctive relief as is necessary to prevent and restrain violations of this Act, and may
upon a proper showing appoint a receiver for the property, assets, business, and affairs of a
franchisor.
Section 49.
A person who violates any provision of this Act or any rule or order thereunder is
liable to the franchisee for actual damages, costs, and attorneys and experts fees. In the case of a
violation of section 4, sections 7 to 9, inclusive, or section 17 of this Act, the franchisee may also
sue for rescission. No person is liable under this section if the defendant proves that the plaintiff
affirmed the transaction with knowledge of the facts concerning the violation.
Each person who directly or indirectly controls a person liable under this section, each principal
executive officer or director of a person so liable, each person occupying a similar status or
performing similar functions, and each agent, employee of a person so liable, who materially aids
in the act or transaction constituting the violation, is also liable jointly and severally with and to the
same extent as such person, unless the person liable proves that he or she did not know, and in the
exercise of reasonable care could not have known, of the existence of the facts by reason of which
the liability is alleged to exist.
In any suit authorized by this section, other relief may be awarded as the court deems appropriate
and the court may in its discretion, if the circumstances are sufficiently egregious, increase the award
of damages to an amount not to exceed three times the actual damage sustained.
Except as explicitly provided in this section, no civil liability in favor of any private party may
arise against any person by implication from or as a result of the violation of any provision of this
Act or any rule or order thereunder. Nothing in this section limits any liability which would exist by
virtue of any other statute or under common law if this Act were not in effect.
Section 50.
No person may obtain relief for an action pursuant to section 49 of this Act:
(1) In an action for rescission pursuant to section 4, sections 7 to 9, inclusive, or section 17
of this Act unless the action is instituted within one year after the violation occurred;
(2) In an action for actual damages, costs, and attorneys and experts fees unless instituted
within the earlier of two years after discovery of the facts constituting the violation or
three years after the violation; or
(3) Upon receipt by the franchisee of a rescission offer in a form approved by the director
unless the action is instituted within ninety days after the receipt by the franchisee of a
rescission.
Section 51.
That
§
§
37-5A-1
to 37-5A-87, inclusive, be repealed.
Section 52.
Any action or proceeding that is pending on July 1, 2008 or may be instituted on the
basis of conduct occurring before July 1, 2008, is still subject to the provisions of chapter 37-5A as
of June 30, 2008. However, no civil action may be maintained to enforce any liability under chapter
37-5A unless instituted within any period of limitation that applied when the cause of action accrued
or within three years after July 1, 2008, whichever is earlier.
Section 53.
Any effective registration and administrative order relating to the registrations, rules,
statements of policy, interpretative opinions, declaratory rulings, no action determinations, and
conditions imposed on the registrations prior to July 1, 2008 remain in effect while they would have
remained in effect if this Act had not been enacted. They are considered to have been filed, issued,
or imposed under this Act, but are exclusively governed by chapter 37-5A as of June 30, 2008.
Section 54.
Chapter 37-5A as of June 30, 2008, exclusively applies to an offer or sale made
within one year after the effective date of this Act pursuant to an offering made in good faith before
the effective date of this Act on the basis of an exemption available under chapter 37-5A.
Section 55.
That
§
37-25A-1
be amended to read as follows:
37-25A-1.
Terms used in this chapter, unless the context otherwise requires, mean:
(1)
"Advertising," any circular, prospectus, advertisement, or other material or any
communication by radio, television, pictures, or similar means used in connection with
an offer or sale of any business opportunity;
(2)
"Business opportunity," a contract or agreement, between a seller and purchaser, express
or implied, orally or in writing, wherein it is agreed that the seller shall provide to the
purchaser any products, equipment, supplies, or services enabling the purchaser to start
a business and the seller represents that:
(a)
The seller shall provide or assist the purchaser in finding locations for the use or
operation of vending machines, racks, display cases, or other similar devices, on
premises neither owned nor leased by the purchaser or seller;
(b)
The seller shall provide or assist the purchaser in finding outlets or accounts for the
purchaser's products or services;
(c)
The seller shall purchase any products made, produced, fabricated, grown, bred, or
modified by the purchaser;
(d)
The seller guarantees that the purchaser shall derive income from the business
which exceeds the price paid to the seller;
(e)
The seller shall refund all or part of the price paid to the seller, or repurchase any
of the products, equipment, or supplies provided by the seller, if the purchaser is
dissatisfied with the business; or
(f)
The seller shall provide a marketing plan;
(3)
"Director," the director of the division of securities;
(4)
"Franchise," a contract or agreement as defined in section 1 of this Act;
(5)
"Franchisee," a person to whom a franchise is granted;
(6)
"Franchisor," a franchisor as defined in section 1 of this Act;
(7)
"Marketing plan," advice or training provided to the purchaser by the seller pertaining to
the sale of any products, equipment, supplies, or services and the advice or training
includes, but is not limited to, preparing or providing:
(a)
Promotional literature, brochures, pamphlets, or advertising materials;
(b)
Training regarding the promotion, operation, or management of the business
opportunity; or
(c)
Operational, managerial, technical, or financial guidelines or assistance;
(8)
"Offer" or "offer to sell," includes every attempt to dispose of a business opportunity for
value or solicitation of an offer to purchase a business opportunity;
(9)
"On-going business," an existing business that, for at least six months prior to the offer,
has been operated from a specific location, has been open for business to the general
public and has substantially all of the equipment and supplies necessary for operating the
business;
(10)
"Person," an individual, corporation, trust, partnership, incorporated or unincorporated
association or any other entity;
(11)
"Purchaser," a person who enters into a contract or agreement for the acquisition of a
business opportunity or a person to whom an offer to sell a business opportunity is
directed;
(12)
"Sale" or "sell," includes every contract or agreement of sale, contract to sell, disposition
of a business opportunity or interest in a business opportunity for value;
(13)
"Seller," a person who sells or offers to sell a business opportunity or any agent or person
who directly or indirectly acts on behalf of such person or a person recommended by the
seller.
Section 56.
That
§
37-25A-2
be amended to read as follows:
37-25A-2.
For the purposes of this chapter, the term, business opportunity, does not include:
(1)
Any offer or sale of an on-going business operated by the seller and sold in its entirety;
(2)
Any offer or sale of a business opportunity to an on-going business if the seller provides
products, equipment, supplies, or services which are substantially similar to the products,
equipment, supplies or services sold by the purchaser in connection with the purchaser's
on-going business;
(3)
Any offer or sale of a business opportunity which has notice filed or is exempt from
notice filing pursuant to sections 1 to 50, inclusive, of this Act or any offer or sale of a
business opportunity that is excluded from the definition of business opportunity as set
forth in 16 C.F.R. Part 437 as of January 1, 2008;
(4)
Any offer or sale of a business opportunity registered pursuant to chapter 47-31B;
(5)
Any offer or sale of a business opportunity involving a marketing plan made in
conjunction with the licensing of a federally registered trademark or federally registered
service mark if the seller had a minimum net worth of one million dollars as determined
by the seller's most recent audited financial statement, prepared within thirteen months
of the first offer in this state. Net worth may be determined on a consolidated basis if the
seller is at least eighty percent owned by one person and that person expressly guarantees
the obligations of the seller with regard to the offer or sale of any business opportunity
claimed to be excluded under this subdivision;
(6)
Any offer or sale of a business opportunity by an executor, administrator, sheriff, marshal,
receiver, trustee in bankruptcy, guardian, or conservator or a judicial offer or sale of a
business opportunity.
Section 57.
That
§
37-25A-3
be amended to read as follows:
37-25A-3.
The following business opportunities are exempt from §§ 37-25A-7 to 37-25A-24,
inclusive:
(1)
Any offer or sale of a business opportunity for which the immediate cash payment made
by the purchaser for any business opportunity is at least twenty-five thousand dollars if
the immediate cash payment does not exceed twenty percent of the purchaser's net worth
as determined exclusive of principal residence, furnishings therein, and automobiles.
However, the director of the Division of Securities may, by rules adopted pursuant to
chapter 1-26, withdraw or further condition the availability of this exemption;
(2)
Any offer or sale of a business opportunity for which the purchaser is required to make
a payment to the seller or a person recommended by the seller that is less than five
hundred dollars during the period from any time before commencing operation to within
six months after commencing operation of the business opportunity;
(3)
Any offer or sale of a business opportunity if the seller has a net worth of not less than one
million dollars as determined by the seller's most recent audited financial statement,
prepared within thirteen months of the first offering in this state. Net worth may be
determined on a consolidated basis if the seller is at least eighty percent owned by one
person and that person expressly guarantees the obligations of the seller with regard to the
offer or sale of any business opportunity claimed to be exempt under this subdivision. The
director may, by rules adopted pursuant to chapter 1-26, withdraw or further condition the
availability of this exemption;
(4)
Any offer or sale of a business opportunity if the purchaser is a bank, savings and loan
association, trust company, insurance company, credit union, or investment company as
defined by the Investment Company Act of 1940, pension or profit sharing trust, or other
financial institution or institutional buyer or a dealer registered pursuant to chapter 47-
31B, if the purchaser is acting for itself or in a fiduciary capacity;
(5)
Any offer or sale of a business opportunity which is defined as a franchise in subdivision
37-25A-1(4) if the seller delivers to each purchaser at least fourteen calendar days prior
to the earlier of the execution by a purchaser of any contract or agreement imposing a
binding legal obligation on the purchaser or the payment by a purchaser of any
consideration in connection with the offer or sale of the business opportunity, a disclosure
document as defined in section 1 of this Act and notice filed with the Division of
Securities pursuant to sections 1 to 50, inclusive, of this Act, or any offer or sale of a
business opportunity that is exempt from the disclosure requirements as set forth in 16
C.F.R. Part 437 as of January 1, 2008;
(6)
Any offer or sale of a business opportunity for which the cash payment made by a
purchaser for any business opportunity does not exceed five hundred dollars and the
payment is made for the not-for-profit sale of sales demonstration equipment, material,
or samples, or the payment is made for product inventory sold to the purchaser at a bona
fide wholesale price;
(7)
Any offer or sale of a business opportunity which the director exempts by order or a class
of business opportunities which the director exempts by rule upon the finding that such
exemption is not contrary to public interest and that registration is not necessary or
appropriate for the protection of purchasers.
Section 58.
That
§
37-25A-8
be amended to read as follows:
37-25A-8.
In order to register a business opportunity, the seller shall file with the director of the
Division of Securities one of the following disclosure documents with the appropriate cover sheet
as required by § 37-25A-15, a consent to service of process as specified in § 37-25A-9 and the
appropriate fee as required by § 37-25A-10:
(1)
A disclosure document prepared pursuant to
§
37-25A-15; or
(2)
A disclosure document prepared pursuant to 16 C.F.R. Part 437 as of January 1, 2008.
Section 59.
That chapter
37-25A
be amended by adding thereto a NEW SECTION to read as
follows:
The director may impose a civil penalty against a person named in an order issued under
§
37-25A-30 for violation of
§
§
37-25A-7, and 37-25A-43 to 37-25A-46, inclusive. The amount of
the civil penalty may not exceed five thousand dollars for each act or omission that constitutes the
basis for issuing the order. Any civil penalty collected pursuant to this section shall be deposited into
the state general fund. The civil penalty may only be imposed:
(1) Following an opportunity for a hearing under
§
37-25A-30 if notice delivered to all named
persons includes notice of the director's authority to impose a civil penalty under this
section; or
(2) As part of an order issued pursuant to
§
37-25A-30(1) if the order is stipulated to by each
person subject to the civil penalty.
Section 60.
That
§
4-4-4.3
be amended to read as follows:
4-4-4.3.
There is established within the state treasury the securities operating fund and the
insurance operating fund, into which shall be deposited all fees received by each division. All
moneys in the funds created by this section shall be budgeted and expended in accordance with the
provisions of Title 4 on warrants drawn by the state auditor on vouchers approved by the secretary
of the Department of Revenue and Regulation. Expenditures from these funds may be made only to
pay the necessary expenses of purposes specified in sections 1 to 50, inclusive, of this Act, and
chapters 37-25A, 47-31B, 47-33, and Title 58.
An Act to revise certain provisions regarding the regulation of franchises and business opportunities.
=========================
I certify that the attached
Act
originated in the
SENATE as
Bill
No.
52
____________________________
Secretary of the Senate
=========================
____________________________
President of the Senate
____________________________
Secretary of the Senate
____________________________
Speaker of the House
____________________________
Chief Clerk
Senate
Bill
No.
52
File No. ____
Chapter No. ______
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=========================
Received at this Executive Office
this _____ day of _____________ ,
20____ at ____________ M.
By _________________________
for the Governor
=========================
The attached Act is hereby
approved this ________ day of
______________ , A.D., 20___
____________________________
Governor
=========================
STATE OF SOUTH DAKOTA,
ss.
Office of the Secretary of State
Filed ____________ , 20___
at _________ o'clock __ M.
____________________________
Secretary of State
By _________________________
Asst. Secretary of State
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