DEPARTMENT OF ATTORNEY GENERAL

CONSUMER PROTECTION AND CHARITABLE TRUSTS DIVISION

FRANCHISES

(By authority conferred on the department of commerce by section 41 of Act No. 269 of

the Public Acts of 1974, being S445.1541 of the Michigan Compiled Laws)

PART 1. GENERAL PROVISIONS

R 445.101 Definitions and explanations of terms.

Rule 101. (1) "Act" means Act No. 269 of the Public Acts of 1974, being S445.1501 et

seq. of the Michigan Compiled Laws. Terms defined in the act have the same meanings

when used in these rules. Terms defined and explained herein have the same meanings

when used in either the act or these rules.

(2) The words "fee or charge" as used in section 3(1) of the act include, but are not limited

to:

(a) Present payments, deferred payments, and royalty payments required of the franchisee

by the franchisor arising from sales of goods or services offered by the franchisee or its

agents or affiliates, or payments as a condition to maintaining the franchise relationship

other than payment for goods at a bona fide wholesale price.

(b) Payments for a lease or sale of real property in excess of a fair rental or market value.

Among the criteria for evaluation of fair rental or market value shall be the location of the

property, the physical attributes of the property, and what other lessees or purchasers have

paid for similar property in comparable locations.

(c) Payments for services. These payments are presumed to be in part for the right granted

to the franchisee to engage in the franchise business. Ideas, instruction, training, and other

programs are services and not goods, irrespective of whether offered, distributed, or

communicated by word of mouth, through instructions or lectures, in written or printed

form, by record or tape recording, or any combination thereof.

(d) Payments for ownership. These payments include transfer of a controlling interest in

a business entity which holds a franchise, except those transfers where the franchise held

is not the principal asset of the transferor and not part of a plan of distribution of franchises.

(e) Minimum purchase or minimum inventory requirements other than at a bona fide

wholesale price for which there is a well-established market in this state.

(3) "Initial and deferred franchise fee" means the amount of the franchise fee charged at

the time of entry into the business, whether paid in full upon commencement or paid on a

deferred basis. For purposes of R 445.801, it does not include royalties or other franchise

fees measure by the amount of goods or services sold during the operation of the franchise.

(4) "Prescribed in substantial part by the franchisor," as used in section 2(3)(a) of the act,

shall be interpreted in light of the following:

(a) A marketing plan may be determined to be prescribed if the franchise or other written

or oral agreement, the nature of the franchise business, or other circumstances permit or

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require the franchisee to follow an operating plan or standard operating procedure, or their

substantial equivalent, promulgated by or for the franchisor. An operating plan or standard

operating procedure includes required procedures, prohibitions against certain business

practices, or recommended or offered practices, whether or not enforceable with economic

sanctions.

(b) A marketing plan may be determined to be prescribed without regard to whether the

franchisee is an independent contractor and not the agent of the franchisor, and

notwithstanding provisions of a franchise or other agreement purporting to grant the

franchisee complete freedom in operating his business.

(c) The presence of any of these factors, among others, indicates that a marketing plan or

system is prescribed in substantial part by the franchisor:

(i) Representations by, or requirements of, the franchisor that the franchisee operate a

business which can purchase a substantial portion of its goods solely from sources

designated or approved by the franchisor.

(ii) Representations by, or requirements of, the franchisor that the franchisee follow an

operating plan, standard procedure, training manual, or its substantial equivalent

promulgated by the franchisor in the operation of the franchise, violations of which may,

under the terms of the agreement, permit the franchisor to terminate or refuse to renew the

agreement.

(iii) Representations by, or requirements of, the franchisor that the franchisee is limited

as to type, quantity, or quality of any product or service the franchisee may sell, or that

limit the franchisee as to the persons or accounts to which he may sell the franchisor's

product or service.

(iv) Representations by, or requirements of, the franchisor that the franchisor aid or assist

the franchisee in training or in obtaining locations or facilities for operation of the

franchisee's business, or in marketing the franchisor's product or service.

(5) A franchisee's business is "substantially associated," as used in section 2(3)(b) of the

act, with the franchisor's trademark, service mark, trade name, logotype, advertising, or

other commercial symbol designating the franchisor or its affiliate if the franchise or other

agreement, the nature of the franchise business, or other circumstances permit or require

the franchisee to identify its business to its customers primarily under that trademark,

service mark, trade name, logotype, advertising, or other commercial symbol, hereinafter

referred to collectively as the "franchisor's mark," or to otherwise use the franchisor's

mark in a manner likely to convey to the public that it is an outlet of or represents directly

or indirectly the franchisor. The following factors, among others, indicate that the business

of a franchisee is substantially associated with the franchisor's mark:

(a) The identification of the franchisor's mark is utilized either by the franchisor or the

franchisee to enhance the chances of the franchisee's success in respect to the franchisee's

transactions with persons dealing in, or purchasing, the franchisor's products or services.

(b) An agreement or procedure providing for the franchisee to directly or indirectly

contribute a portion of its operating revenue to the franchisor for advertising expenses.

(6) "Bona fide wholesale price," as used in section 3(1)(a) of the act, refers to a price

which constitutes a fair payment for goods purchased at a comparable level of distribution,

and no part of which constitutes a payment for the right to enter into, or continue in, the

franchise business. Goods sold at a bona fide wholesale price may include, but are not

limited to, goods sold to the franchisee for resale, as well as fixtures, equipment, raw

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materials, supplies, and other goods used by the franchisee in the conduct of the franchise

business. The price charged for a trademarked product does not exceed its bona fide

wholesale price merely because the price exceeds the wholesale price of nontrademarked

products of comparable quality and specifications. If the trademarked product

commands a premium price by virtue of the trademark it carries, the premium does

not necessarily constitute the payment of a franchise fee. A payment made directly or

indirectly by the franchisee to or for the benefit of the franchisor in excess of the

bona fide wholesale price constitutes a franchise fee. Services, rental payments, and

the lease of real or personal property are not within the category of "goods,"

irrespective of whether payment for the services or property constitutes a fair payment

for comparable services or property. In a determination as to whether the price of goods

arising from a marketing plan or system of a manufacturer, licensor, or a franchisor is

a bona fide wholesale price, relevant cost, marketing, pricing, or payment information,

among other factors, may be considered.

(7) The existence of a "well-established market," as used in section 3(1)(a) of the act, is a

question of fact determined by the presence, among other factors, of the following:

(a) A number of presently existing wholesale and retail outlets of the franchisor or

competitors in a similar line of business.

(b) The quantity and price of like or similar products presently sold in an existing

geographical area in Michigan.

(c) The ability of the purchaser to resell at the suggested retail price of the manufacturer

or wholesaler or at a reasonable markup over the purchaser's cost.

(d) The ability of the purchaser to return any unsold portion of the product without

penalty.

(8) The existence of the following factors, among others, which shall be interpreted by

considering the previous operating history of the franchisor and its existing franchisees,

indicates an offer the terms of which would create an "unreasonable risk" of loss of

investment or failure of

a franchisee's business as used in section 13(c) of the act to a prospective franchisee:

(a) Offerings whereby a franchisor or an affiliated person has received, or will receive, a

substantial portion of his income from the sale of franchises rather than from the sale of

goods, services, or continuing royalties relating to the operation of the franchise, and it

appears to the administrator that the success of the franchisor's program is based on the

sale of franchises rather than the sale of goods and services by the franchisee.

(b) Offerings where the natural person as a franchisor, or the officers, directors, partners,

or affiliates of a franchisor, have received or will receive unreasonable front-end

compensation from the payment of franchise fees in relation to the present and future

services to be provided or the value of the franchise right prior to the establishment of

the franchise.

(c) Offerings which permit the franchisor to directly or indirectly convey, assign, or

otherwise transfer its responsibility to fulfill contractual obligations to franchisees unless

the commitments to establish the franchise have been met or provided for and adequate

provision has been made for providing further required contractual services, and the

agreement shall so state.

(d) Offerings in which the franchisor is a shell or an undercapitalized corporation.

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(e) Offerings which provide excessive compensation to a franchisor in relation to the

services, goods, or value provided and their likely profit to the franchisee.

(f) Offerings which involve excessive sales commissions in relation to the likely profit to

the franchisee.

(g) Offerings which provide that a franchisor may unilaterally, during the term of the

franchise agreement, require unlimited or excessive increases in a royalty payment or

require increases in price of goods and services other than on a uniform basis to all persons

similarly situated.

(h) Offerings which permit or provide the opportunity for an excessive or improper

conflict of interest between the franchisor and franchisee. Dual distribution systems shall

not per se be construed as a conflict of interest.

(i) Offerings which permit or provide that the franchisor may receive from the franchisee,

or arrange for third parties to receive a note or series of notes, singularly or in combination,

not exceeding $15,000.00, without reserving to the franchisee a defense arising out of a

default by the franchisor.

(j) Offerings which fail to provide that a franchisor shall, upon demand, furnish the

franchisee an accurate annual financial statement, unless the franchisor is filing annual

reports pursuant to the securities exchange act of 1934 or is registered under the Michigan

franchise investment law.

(9) "Material change," as used in section 19 of the act, includes, but is not limited to:

(a) The termination, closing, or failure to renew, during a 3-month period, of the lesser

of 10 or 10% of the franchises of a franchisor, regardless of location, except that franchisors

with an excess of 200 existing franchises shall file a report only upon the termination,

closing, or nonrenewal of 5% or more of its franchises, or the termination, closing, or

failure to renew, during a 3-month period, of the greater of 3 or 10% of the franchises of

a franchisor located in the state.

(b) A purchase of franchises by the franchisor in excess of 5% of its existing franchises

during 6 consecutive months.

(c) A change in the franchise fees charged by the franchisor.

(d) A significant adverse change in any of the following:

(i) The obligations of the franchisee to purchase items from the franchisor or its

designated sources.

(ii) The limitations or restrictions on the goods or services which the franchisee may offer

to its customers.

(iii) The obligations to be performed by the franchisor.

(iv) The franchise contract or agreement, including amendments thereto.

(v) The franchisor's accounting system resulting in a 5% or greater change in its net profit

or loss in any 6-month period.

(vi) The service, product, or model line.

(10) "Net worth," as used in section 6(2)(a) of the act, means the excess of assets over

liabilities, which is derived by the use of generally accepted accounting principles

consistently applied and documented in the form of a balance sheet, with the exception

that:

(a) Intangible assets shall include only the liquidation value of the intangibles.

(b) Receivables of a franchisor due from its franchisees shall be stated with an appropriate

asset offset or reserve for losses.

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(c) Lump sum franchise fee receipts, or a portion thereof, shall be offset by a "liability"

for accrued obligations to be performed in the future in consideration for receipt of the fees.

(11) "Officer" means the president, vice president, secretary, or treasurer of a corporation,

or a person occupying a similar status or performing similar functions.

(12) "Specified number of days" means calendar days, including Saturdays, Sundays, and

holidays, unless the act or rule specifically indicates that business days are intended.

(13) Wherever the context of these rules requires, in order to conform to the intent of the

act, the term "franchisor," as used herein, shall include subfranchisor.

(14) "Administrator," as used in these rules, means the director of the department of

commerce or the director of the corporation and securities bureau.

(15) For the purposes of regulations, agents shall be divided into 2 categories:

(a) Franchise agents who represent only 1 franchisor and who are regulated pursuant to

part 6 of these rules.

(b) Franchise agents who represent more than 1 franchisor or who employ persons to

assist in the sale of a franchise and who are regulated pursuant to part 7 of these rules.

(c) A franchise agent does not include the following:

(i) A person effecting transactions in a franchise exempted by sections 6(2)(c), (d), (e),

(f), (g), (h), (j), or (k) of the act.

(ii) A partner, officer, or director of a franchisor whose personal history is described in

the prospectus and who represents the franchisor in effecting the offer or sale of a franchise.

(iii) Other persons excluded by order in the discretion of the administrator from all or part

of the requirements of part 6 or 7 of these rules if:

(A) The contact of such person with prospective franchisees is minimal and does not

involve a solicitation to purchase a franchise, or

(B) The person is registered under the Michigan uniform securities act, acting with written

approval of his registered broker-dealer.

(d) A franchise agent may only be a natural person.

History: 1979 AC.

PART 2. REGISTRATION REQUIREMENTS

R 445.201 Documents accompanying application for registration or notification of

exemption.

Rule 201. Without limiting the administrator's power to require additional information

under section 8(t) of the act, an application for registration of a franchise, or a notification

of an exemption pursuant to section 6(2)(a) or (b) of the act, shall be accompanied by:

(a) Upon request of the administrator, a copy of the current articles of incorporation and

annual reports and amendments thereto, except that in the case of a partnership, the

certificate of co-partnership shall be submitted. In the case of doing business under an

assumed name, the assumed name certificate shall be submitted.

(b) A copy of any contractual agreement between the franchisor and franchise broker-

agent relating to the sale of a franchise.

(c) A copy of the typical current franchise contract.

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(d) A copy of the operations manual and policy manual, or their equivalent. The

administrator shall, upon request, retain those portions of the document containing trade or

business secrets as a confidential document. The administrator may, in its discretion, return

an operations manual and policy manual, or their equivalent, if a determination is made

that the document does not contain information necessary to establish legal or economic

relationships between the franchisee and franchisor. The administrator may require

delivery of portions to each prospective franchisee at least 1 week prior to sale. The

franchisor may require execution by that prospective franchisee of an agreement of

confidentiality on a form acceptable to the administrator.

(e) Other documents or information necessary to establish the legal and economic

relationships to be created between the franchisee and franchisor.

(f) Documents or information filed with the federal trade commission under its franchise

disclosure requirements.

(g) An irrevocable consent to service of process, pursuant to the act, in the prescribed

form, or in a uniform form satisfactory to the administrator containing substantially the

same provisions.

History: 1979 AC.

R 445.202 Offering prospectus.

Rule 202. The offering prospectus shall be in the format and contain the information

prescribed by the administrator. The form shall be available to the applicant at the

administrator's office.

History: 1979 AC.

R 445.203 Periodic reports of sales.

Rule 203. When the administrator deems necessary to assure compliance with sections 5

or 6 of the act, it may by order require that a registrant or person exempt pursuant to section

6(2)(a) or (b) of the act file periodic reports of sales in a format prescribed by the

administrator.

History: 1979 AC.

R 445.204 Conditions regarding sales.

Rule 204. In lieu of entry of a stop order pursuant to section13 of the act, the administrator

may impose conditions regarding the sale of franchises as necessary for the protection of

the public.

History: 1979 AC.

R 445.205 List of franchisees and current business addresses.

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Rule 205. The franchisor shall at all times maintain a list of franchisees with current

business addresses and provide the list to the administrator promptly upon request.

History: 1979 AC.

R 445.206 Reports required.

Rule 206. Pursuant to the authority granted by sections 8(g), (r), and (t) of the act, the

administrator may require franchisors, directly or indirectly offering to sell or selling

franchises in this state under section 6(1) of the act, to file with the administrator, within a

period of 120 days from the last date of its fiscal year, both of the following:

(a) A copy of their annual report, if any, and audited certified financial statements, or

unaudited financial statements prepared by a certified public accountant if the requirement

for audited financial statements has been waived by the administrator.

(b) A graphic representation of specific geographical sites sold to franchisees in Michigan

in the last fiscal year, either by the franchisor or with franchisor approval of location.

History: 1979 AC.

R 445.207 Failure to process application.

Rule 207. For purposes of section 13(h) of the act, an applicant has failed to diligently

process an application when 7 consecutive months have elapsed since the submission of an

application that has not become effective.

History: 1979 AC.

R 445.208 Revising, amending, or supplementing prospectus or operations manual;

review.

Rule 208. (1) If the prospectus, operations manual, or a part thereof becomes misleading

as to a material fact, or omits to state a material fact necessary in order to make the

statement made, in the light of the circumstances under which they are made, not

misleading, it shall be revised or supplemented, and the revision or supplement shall be

submitted to the administrator prior to use.

(2) The administrator shall promptly review the amendment and advise the registrant

when the administrator's objection to the use of the amended prospectus ceases. An offer

or sale shall not be made prior to notification by the administrator.

(3) If the registration renewal statement, or an amendment to an application for

registration or notification of an exemption, alters the text of the offering prospectus, or of

an item, exhibit, or other document previously filed as a part of an application for

registration, or notification of an exemption, the changes in the text shall be indicated by

means of underscoring or in some other appropriate manner.

History: 1979 AC.

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R 445.209 Permissible omissions.

Rule 209. The administrator may permit the omission of an item of information or

document from a registration statement.

History: 1979 AC.

R 445.210 Fees.

Rule 210. (1) The fee for filing an application for registration with the department shall

be $500.00. The annual renewal registration fee shall be $250.00. The payment shall be in

the form of check or money order made payable to the "State of Michigan" and shall not

be postdated.

(2) The fee for filing a notification of exemption with the department for a transaction

exempted from registration shall be $100.00 and shall be in the form of check or money

order payable to the "State of Michigan" and shall not be postdated. The fee for filing a

notification of exemption pursuant to section 6(2)(h), 6(2)(j), or 7 of the act shall be $10.00.

(3) If a company offers 2 or more franchises which are sufficiently similar in nature that

it is feasible, in the opinion of the administrator, to combine the required application

document and prospectus in a single application for registration, it may, at the request of

the franchisor, authorize the filing of a single application for registration covering the

similar franchises and the payment of a single filing fee covering the franchises.

(4) If a company offers 2 or more franchises which are sufficiently dissimilar that a single

registration would tend to confuse prospective franchisees, the administrator may require

separate registrations for each franchise and the payment of a separate fee for each

franchise.

History: 1979 AC.

R 445.211 Effectiveness of first filings.

Rule 211. (1) A franchise offering which becomes effective between January 13, 1975,

and June 30, 1975, shall be registered, unless the administrator approves a different period

of registration, for period determined according to the following schedule:

If the Franchisor's Name

Commences With:

The Franchise Offering is Registered

or Exeempted for a Period of:

A through H

15 months from the effective date of

registration or exemptions I through P

14 months from the effective date of

registration or exemptions Q through Z

13 months from the effective date of

registration or exemptions

(2) This rule shall not be of force and effect on or after October 1, 1976.

History: 1979 AC.

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PART 3. ESCROW

R 445.301 Imposition of escrow.

Rule 301. If the department finds that the applicant failed to demonstrate that adequate

financial arrangements were made to fulfill obligations to provide real estate,

improvements, equipment, inventory, training, or other items included in an offering, the

administrator may impose, as a condition to registration or exemption, an escrow of not

more than 100% of the franchise fees and other funds paid by the franchisee or

subfranchisor until these obligations are fulfilled.

History: 1979 AC.

R 445.302 Escrow requirements.

Rule 302. When an escrow is imposed in connection with the registration or exemption

of a franchise offering, the account shall comply with the following requirements:

(a) Checks shall be made payable to the depository approved by the administrator.

(b) The account shall be established in a bank or trust company acceptable to the

administrator, and the funds shall be kept and maintained in an account separate and

apart from the franchisor's business and personal accounts.

(c) All proceeds so deposited shall remain the property of the franchisee and shall

not be subject to any liens or charges by the escrow agent, or judgments, garnishments,

or creditor's claims against the franchisor until released to the franchisor as hereinafter

provided. This escrow is for the benefit of each franchisee in the amount paid by each

franchisee.

(d) At the administrator's discretion, a statement indicating the status of the escrow shall

be furnished by the bank or trust company to the administrator.

(e) A trust or escrow agreement shall be entered into between the bank or trust company,

and the franchisor, which shall state that its purpose is to protect the franchisee or

subfranchisor and shall authorize the administrator to inspect the records of the bank

or trust company, as trustee, relating thereto, and shall state that, upon order of

the administrator or a court of competent jurisdiction, the trustee shall release and pay

over the funds, or a portion thereof, to the franchisor, subfranchisor, or franchisee, as

directed.

(f) The department, by its administrator, shall execute an acknowledgment on the face of

each escrow or trust agreement. This acknowledgment indicates approval on the form and

content of the agreement, but shall not be construed to make the department a party thereto.

History: 1979 AC.

R 445.303 Purchase receipts.

Rule 303. When an escrow is imposed, the franchisor shall deliver to each franchisee or

subfranchisor a purchase receipt in a form approved by the administrator. Purchase receipts

shall be consecutively numbered and prepared in quadruplicate: The original given to the

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franchisee or subfranchisor, the first copy to the depository together with the payment

received, the second copy retained by the franchisor, and the third copy sent to the

administrator.

History: 1979 AC.

R 445.304 Release of escrowed funds.

Rule 304. (1) The administrator shall authorize the depository to release to the franchisor

those amounts of the escrowed funds applicable to a specified franchisee or subfranchisor

upon a showing satisfactory to the administrator that the franchisor has fulfilled its

obligations under the franchise agreement to establish the franchise, or that the escrow is

not required for the protection of the franchisee.

(2) An application for an order of the administrator authorizing the release of escrowed

funds to the franchisor shall be verified and shall contain:

(a) A statement of the franchisor that required proceeds from the sale of franchises have

been placed with the depository in accordance with the terms and conditions of the escrow

agreement.

(b) A franchisee's verified statement of completion of franchisor's obligations for release

of funds from escrow.

(c) A statement of the depository signed by an appropriate officer setting forth the

aggregate amount of escrowed funds placed with the depository when required by the

administrator.

(d) The names of each franchisee or subfranchisor and the amount held in escrow for the

account of the franchisee or subfranchisor.

(e) A showing that the franchisor, with respect to a franchise, the funds for which are

sought to be released, has completely performed obligations, cited by reference to the

franchise agreement and its provisions, to provide real estate, improvements, equipment,

inventory, training, or other items.

(f) Other information the administrator may reasonably require.

(3) If the administrator finds that any conditions of this agreement have not been

satisfied or that any provisions of the Michigan franchise investment law or rules have

not been complied with, or the registration of the franchises has been revoked, then the

administrator may withhold such authorization for release of funds by the escrow

agent to the franchisor and may direct the full return of funds by the escrow agent to

the franchisees.

History: 1979 AC.

R 445.305 Surety bond in lieu of escrow.

Rule 305. (1) In lieu of the imposition of an escrow, a franchisor at his option may post a

surety bond of a surety company in the amount required by the administrator as protection

of the franchisees requires.

(2) The surety company must be authorized to transact business in Michigan.

(3) The administrator shall take into consideration the amount of the franchise fees and

other fees to be charged as well as the number of franchises to be offered, granted, or

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sold in determining the initial amount of the surety bond and shall amend the amount

as public interest requires, using the same factors.

(4) Should the franchisor fail to complete the obligations under the franchise contract

to provide real estate, improvements, equipment, inventory, training, or other items

included in the offering, the surety company may pay the appropriate money to the

administrator or his designee, as obligee, for the benefit of all franchises in accordance

with their contribution of franchise and other fees or amounts.

(5) If the surety bond expires or is canceled and the franchisor is still under an obligation

to provide real estate, improvements, equipment, inventory, training, or other items, the

franchisor at his option may either post another surety bond or have an escrow of franchise

and other fees imposed by the administrator. Until another surety bond acceptable to the

administrator is purchased or escrow is imposed, the franchisor shall not make any new

sales.

(6) The state may be a party to the surety bond and shall, through the administrator, review

its form and content.

History: 1979 AC.

PART 4. EXEMPT TRANSACTIONS

R 445.401 Exemptions based on franchisor's net worth or initial investment.

Rule 401. (1) Franchisors relying on the exemptions provided by section 6(2)(a) or (b)

of the act shall file the information required on the form and accompanying instructions

currently prescribed by the administrator, as well as the documents listed in R 445.201.

(2) A franchisor seeking to claim the exemption provided by section 6(2)(a) or (b) of the

act shall so state on the cover of its prospectus and agree to abide by the prospectus delivery

requirements of section 16 of the act.

History: 1979 AC.

R 445.402 Exemptions based on limited number of offerees.

Rule 402. The exemption provided by section 6(2)(k) of the act shall pertain to only those

franchisors who:

(a) Do not have more than 1 existing franchise within or without the state prior to the offer

of a franchise under this part, and

(b) Provide disclosure to the franchisee offeree as required in sections 5(1)(b) and 5(2) of

the act.

History: 1979 AC.

R 445.403 Reports to be filed.

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Rule 403. (1) Franchisors, directly or indirectly offering to sell or selling franchises in

this state under section 6(2)(a) or (b) of the act, shall file with the administrator, within a

period of 120 days from the

last day of its fiscal year, a copy of their annual report, if any, and an audited certified

financial statement or unaudited financial statement prepared by a certified public

accountant if the requirement for submission of an audited financial statement has been

waived by the administrator.

(2) A franchisor, directly or indirectly offering to sell or selling franchises in this state

under section 6(2)(a), (b), or (j) of the act, shall file with the administrator, within a

period of 120 days from the last day of its fiscal year, graphic representations of the

geographical locations sold to the franchisees in the state in the last fiscal year.

History: 1979 AC.

R 445.404 Material changes to be reported.

Rule 404. Franchisors whose franchises are exempted under section 6(2)(a) or (b) of

the act shall be required, as a condition of maintenance of the exemption after confirmation

thereof as required by the act, to notify the administrator, in writing, within 30 days after

the occurrence of any material fact or material change affecting the franchisor.

History: 1979 AC.

R 445.405 Sales and offers by existing franchisees.

Rule 405. (1) A franchisee seeking to offer or sell a franchise for his own account, whose

franchisor is currently registered or exempted under section 6(2)(a) or (b) of the act, shall

comply with the following disclosure requirements by providing:

(a) The offeree with a copy of the franchisor's current prospectus.

(b) Full access to the books and records of the franchise in the actual or constructive

possession of the franchisee.

(c) Full disclosure relating to the risks of the franchise of which the selling franchisee

knows and which are not readily apparent to an offeree considering the purchase of that

franchise.

(d) Additional material information relating to the franchisor known to the present

franchisee.

(2) A franchisee seeking to offer or sell a franchise for his own account, whose franchisor

is not currently registered under the act but was so registered or exempted under section

6(2)(a) or (b) of the act in the past, shall comply with the following disclosure requirements

by providing:

(a) The offeree with the most recent prospectus of the franchisor used in this state or

elsewhere.

(b) The offeree with access to the material reports and correspondence in the actual or

constructive possession of the franchisee, from the franchisor, relating to the economic

or legal relationship between the franchisee and the franchisor, from the date of the last

prospectus to the present.

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(c) Additional material information relating to the franchisor known to the present

franchisee.

(d) Full access to the books and records of the franchise in the actual or constructive

possession of the franchisee.

(e) Full disclosure relating to the risks of the franchise of which the selling franchisee

knows and which are not readily apparent to an offeree considering purchase of that

franchise.

(3) A franchisee seeking to offer or sell a franchise for his own account, whose

franchisor is not now and has not been registered or exempted under section (6)(2)(a)

or (b) of the act, shall comply with the following disclosure requirements by providing:

(a) Full access to the books and records of the franchise in the actual or constructive

possession of the franchisee.

(b) Full disclosure relating to the risks of the franchise of which the selling franchisee

knows and which are readily apparent to an offeree considering purchase of that

franchise.

(c) Additional material information relating to the franchisor known to the present

franchisee.

(4) The franchisee shall, if requested by the franchisor, furnish an affidavit that he has

complied with the above disclosure requirements.

(5) The exemptions provided by this section shall not be available to a franchisee who

wishes to divide or subdivide his territory, exclusive or otherwise, and sell more than 1

portion or division, except upon written authorization of the administrator.

History: 1979 AC.

PART 5. FINANCIAL STATEMENTS

R 445.501 Accounting principles.

Rule 501. A financial statement required to be filed in connection with an application for

registration under section 6(1) of the act or for an exemption under section 6(2)(a) or

(b) of the act shall be prepared in accordance with generally accepted accounting

principles. A financial statement shall be audited by an independent certified public

accountant, except when the particular form or these rules permit the use of an unaudited

statement for an interim period or generally.

History: 1979 AC.

R 445.502 Balance sheet; profit and loss statement; audit; auditor's opinion.

Rule 502. (1) The financial statement required to be filed by a franchisor refers to:

(a) A balance sheet as of a date within 90 days prior to the date of the application.

(b) A profit and loss statement for each of the 3 fiscal years preceding the date of the

balance sheet and for the period, if any, between the close of the last of the fiscal years

and the date of the balance sheet, unless this requirement is waived or modified by the

administrator.

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(2) If the balance sheet referred to in subrule (1)(a) is not audited, there shall be filed, in

addition, an audited balance sheet as of the end of the franchisor's last fiscal year, unless

such last fiscal year ended within 90 days of the date of the application, in which case

there shall be

filed an audited balance sheet as of the end of the franchisor's next preceding fiscal year.

(3) The profit and loss statement shall be audited up to the date of the last audited balance

sheet filed, if any, unless this requirement is waived or modified by the administrator.

(4) The auditor's opinion shall be filed with the statement when an audited financial

statement filing is required.

History: 1979 AC.

R 445.503 Waiver of audit; conditions and restrictions.

Rule 503. (1) The administrator may, in his discretion, waive the requirement of audited

statements:

(a) For small franchisors when a certified financial statement is not required for protection

of the public, and the franchisor agrees to furnish a certified audit within a reasonable

time.

(b) In extraordinary cases, if the statements have been prepared by an independent

certified public accountant, and the administrator is otherwise satisfied as to the reliability

of the statements and as to the ability of the franchisor to perform future commitments.

(2) A waiver shall ordinarily be granted only upon a showing that the franchisor has not

had prior audited statements; that the close of the most recent or current fiscal year is so

near the time of filing of the application that it would be unreasonably costly or impractical

to provide audited statements with the application; and that audited statements shall be

furnished within a reasonable time after the end of the most recent or current fiscal year.

In those cases, the administrator may impose an impound condition and other conditions

and restrictions, as in his discretion, he deems appropriate.

(3) The use of an unaudited financial statement as provided herein does not relieve the

applicant or any person from liability for false and misleading statements contained in a

financial statement.

(4) In all instances in which the requirement for audited financial statements has been

waived for a specified period of time, a franchisee who purchases a franchise during that

period shall be entitled to damages or rescission under the same terms as provided under

section 31 of the act if, upon availability of audited financial statements or any other

valid basis, it is revealed that material adverse financial conditions existed at the time

of the purchase which were not disclosed, and the prospectus shall so state.

History: 1979 AC.

R 445.504 Exempt franchisor.

Rule 504. A financial statement of a franchisor exempt from registration under section

6(2)(a), (b), or (j) of the act shall be certified and audited by an independent certified

public accountant, unless that requirement is waived by the administrator as not in the

public interest or for the protection of investors.

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History: 1979 AC.

R 445.505 Disclosure.

Rule 505. (1) Whenever an unaudited financial statement is utilized pursuant to this rule,

it shall be accompanied by the following written disclosure or a substantially equivalent

statement, immediately adjacent thereto, in 10-point type:

"This financial statement is prepared without an audit. Investors in or sellers of

franchises should be advised that a certified public accountant has not audited these figures

or expressed his opinion with regard to their contents or form."

(2) If an unaudited financial statement is referred to orally, it shall be accompanied by an

oral statement containing a caveat approximating the language in subrule (1).

History: 1979 AC.

R 445.506 Delays; updated statement or information.

Rule 506. (1) If amendments or other delays cause a financial statement to become more

than 4 months old as of the effective date of the registration statement:

(a) An updated financial statement, as of a date within 4 months of the effective date,

shall be filed if the franchisor fails to have an established record of earnings or is currently

showing losses or a weak financial condition.

(b) A paragraph containing later information as to sales, net income, and financial

condition may be added in lieu of updating the financial statement, in the discretion of

the administrator, when the franchisor has an established record of earnings and is in sound

financial condition.

(2) A financial statement shall be not more than 6 months old as of the effective date of

the registration statement.

(3) If a delay carries the effective date beyond the end of the franchisor's fiscal year,

and by applying due diligence the registrant and accountant may complete the audit prior

to the effective date, a certified statement shall be filed as of the end of the fiscal year.

History: 1979 AC.

R 445.507 Certified public accountant's opinion.

Rule 507. The certified public accountant's opinion shall comply with the following

requirements:

(a) The opinion filed with the administrator shall be dated and manually signed, and shall

identify the financial statement covered by the opinion.

(b) The opinion shall state whether the audit was made in accordance with generally

accepted auditing standards, and shall disclose auditing procedures generally recognized

as normal or deemed necessary under the circumstances of the particular case which have

been omitted, and the reasons for the omission.

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(c) The opinion shall state clearly:

(i) The opinion of the accountant with respect to the financial statement covered by

the report and the accounting principles and practices reflected therein.

(ii) The opinion of the accountant as to any changes in accounting principles or practices

which have a material effect on the financial statement.

(d) The opinion shall state, specifically and clearly, matters to which the accountant takes

exception, and, to the extent practicable, the effect of each exception on the related

financial statement, given either in the auditor's opinion or in a footnote to the financial

statement.

History: 1979 AC.

R 445.508 Certified public accountant's statement.

Rule 508. A financial statement filed with the administrator shall include a manually

signed and dated statement of the certified public accounting firm approving the use of

its name and its opinion in the prospectus and registration statement.

History: 1979 AC.

R 445.509 Change in accountants.

Rule 509. If the independent certified public accountant who has been engaged as the

principal accountant to audit the franchisor's financial statements was not the principal

accountant for the franchisor's most recently filed certified financial statements:

(a) The franchisor shall furnish the administrator with a statement of the date when the

current independent accountant was engaged and whether, in the 18 months preceding the

engagement, there were any disagreements with the former principal accountant on a

matter of accounting principals or practices financial statement disclosure, or auditing

procedure, which, if not resolved to the satisfaction of the former accountant, would have

caused that accountant to make reference in connection with its opinion to the subject

matter of the disagreement.

(b) The franchisor shall request the former accountant to furnish the franchisor with a

letter stating whether it agrees with statements contained in the letter of the franchisor

and, if not, stating the respects in which it does not agree.

(c) The franchisor shall furnish such a letter to the administrator, together with its own.

History: 1979 AC.

R 445.510 Disclosure of accountant's interest.

Rule 510. When a report pursuant to this act or these rules is prepared by an independent

public accountantor certified public accountant who holds, or intends to acquire, a position

or interest in the applicant or registrant covered by the report, full disclosure thereof shall

be made to the administrator and, where appropriate, full disclosure shall be made in

the prospectus.

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History: 1979 AC.

R 445.511 Consolidated and separate statements.

Rule 511. (1) When a franchisor owns, directly or beneficially, a controlling financial

interest in another corporation, the financial statement required to be filed shall reflect, on

a consolidated basis, the financial condition of the franchisor and each of its subsidiaries.

(2) A separate financial statement shall be required for each franchisor or subfranchisor

filing for registration or exemption in this state.

(3) A company controlling 80% or more of a franchisor shall be required to file its

financial statement for review by the administrator, and the financial statement shall not be

included as part of the prospectus except as provided by R 445.512.

(4) A consolidated and separate financial statement shall be prepared in accordance with

generally accepted accounting principles.

History: 1979 AC.

R 445.512 Statement of controlling company.

Rule 512. A complete financial statement of a company controlling the franchisor shall

be required when the controlling company guarantees to assume the duties and obligations

of the franchisor under the franchise agreement. If the franchisor wishes to file a

controlling company financial statement, the controlling company shall guarantee the

obligations of the franchisor or post an acceptable surety bond at the discretion of the

franchisor. Such surety bond must be purchased from a surety company authorized to

transact business in the state of Michigan and in an amount required by the administrator

as protection of the public requires. The amount may be amended by the administrator on

the basis of the amount of fees and the number of franchises sold. If the surety bond is

terminated or canceled while the franchisor is still under an obligation to provide real

estate, improvements, equipment, inventory, training or other items, another surety

bond acceptable to the administrator must be purchased or a guarantee acceptable to

the administrator of the franchisor's obligations must be given before additional

sales can be made.

History: 1979 AC.

R 445.513 Books and records.

Rule 513. (1) The franchisor, unless exempt pursuant to section 6(2)(e) or (k) of the act,

shall make and keep current the following books and records relating to the purchase

or sale of franchises:

(a) Records of original entry containing an itemized daily record of purchases and sales

of franchises, receipts of cash, other debits and credits.

(b) Copies of contracts of purchase or sale.

(c) Records of payments made to persons, directly or indirectly, in connection with the

offer, sale, or purchase of a franchise, itemizing the persons to whom payments were

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made, the date and amount of each payment, the reason for the payment, and the transaction

from which payment arose.

(d) Individual registration records for each franchisee, with name and address, aggregate

amount to be paid, and terms of the payments.

(2) A franchisor shall preserve these records for not less than 6 years.

History: 1979 AC.

R 445.514 Special financial reports.

Rule 514. The administrator may at any time require the filing of a special financial report

by a franchisor currently registered under section 6(1) of the act or exempt under section

6(2)(a) or (b) of the act if it finds that the filing is in the public interest.

History: 1979 AC.

PART 6. FRANCHISE AGENTS

R 445.601 Registration required; limitation on representation; agent as natural

person.

Rule 601. (1) A franchise agent may not participate in the offer or sale of a franchise

currently registered or exempted under section 6(1) or 6(2)(a) or (b) of the act, unless

the franchise agent is registered with the administrator on the appropriate forms filed by

the franchisor or a franchise agent. A franchise agent, except an agent working

exclusively for another franchise agent pursuant to part 7, may not represent more than

1 franchisor, unless the administrator specifically authorized by order the multiple

employment on terms and conditions as are appropriate to the public interest.

(2) A franchise agent may only be a natural person.

History: 1979 AC.

R 445.602 Application for registration; examination; registration order.

Rule 602. (1) An application for franchise agent registration shall be on the form and

contain the information specified by the administrator. In the alternative, a uniform form,

with any necessary supplement satisfactory to the administrator, may be submitted.

(2) An application for franchise agent registration shall be accompanied by a completed

fingerprint record on a form prescribed by the administrator, unless this requirement is

waived by the administrator.

(3) An applicant for registration as a franchise agent may be required to pass a written

examination, testing his knowledge of the franchise investment law and other appropriate

laws or rules. This examination and the minimum passing grade may be varied for any

class of applicants.

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(4) A registration order shall be issued to the franchisor or franchise agent registered

pursuant to part 7. Upon termination of employment for any cause, the order shall promptly

be returned to the administrator for cancellation.

History: 1979 AC.

R 445.603 Failure to complete, or withdrawal of, application.

Rule 603. If an applicant for agent registration fails to complete, or withdraw, an

application within 3 months of the date of filing, the administrator may deny the

application. The administrator may deny a request to withdraw an application.

History: 1979 AC.

R 445.604 Agent registration or application; denial, suspension, or revocation.

Rule 604. The administrator may, by order, deny, suspend, or revoke an agent registration

or application if it finds that the applicant or franchise agent has engaged in conduct set

forth in R 445.704.

History: 1979 AC.

R 445.605 Effective date of registration; expiration; renewal.

Rule 605. (1) A franchise agent's registration may become effective on any date during

the year.

(2) A franchise agent's registration expires on the date of the expiration of the

registration or exemption of the franchisor, or on the date of the expiration of the franchise

agent registration pursuant to part 7, whichever is applicable.

(3) An agent's registration may be renewed if the franchisor or subfranchisor provides

to the administrator, on the form prescribed by the administrator, a list of all franchise

agents, including therewith current home and business addresses and telephone numbers,

or may be renewed by a franchise agent as provided in R 445.705.

History: 1979 AC.

R 445.606 Sales on behalf of multiple franchisors.

Rule 606. In the event that a company controls more than 1 franchisor, franchise agents

of these companies may offer franchises on behalf of each franchisor if the agent files

an application for franchise agent registration to act on behalf of each franchisor.

History: 1979 AC.

R 445.607 Concurrent registration.

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Rule 607. A franchise agent may not be concurrently registered with a franchisor or

subfranchisor and a franchise agent pursuant to part 7 except as provided herein.

History: 1979 AC.

R 445.608 Franchise compliance officer.

Rule 608. (1) A franchisor, subfranchisor, or franchise agent employing franchise agents

shall designate a franchise compliance officer, whose responsibility it shall be to:

(a) Determine that the activities of its franchise agents are in compliance with the

statutes and rules of the state.

(b) Prepare and forward to the administrator a compliance manual which shall thereafter

be distributed to each franchise agent.

(c) Insure that each agent is at all times familiar with the act and rules thereunder, and

the compliance manual.

(2) The compliance manual shall consist of a copy of the act, rules, and instructions

necessary to relate the statutes and rules to the franchise being offered and the procedures

of the offering.

(3) Should an agent be terminated by a franchisor, or voluntarily terminate his

employment due to actions involving a violation of the franchise investment law or

rules thereunder, the franchise compliance officer shall promptly report the termination

and the cause therefor on the form prescribed by the administrator.

History: 1979 AC.

PART 7. FRANCHISE AGENTS

R 445.701 Registration order as condition to commencing activities; expiration of

registration; effective date of renewal registration.

Rule 701. A franchise agent pursuant to this part shall receive a registration order from

the administrator prior to commencing those activities which constitute that person to

be a franchise agent. Registrations expire on March 31, following effectiveness, unless

otherwise ordered by the administrator. A renewal registration is effective on the

date prescribed by the administrator by order.

History: 1979 AC.

R 445.702 Initial or renewal registration; filing and contents of application.

Rule 702. (1) A franchise agent may obtain an initial or renewal registration by filing

with the administrator an application, together with a consent to service of process on

the form prescribed by the administrator. This application shall contain the information

the administrator requires relating to the following:

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(a) The qualifications and business history of the applicant and its partners, officers,

directors, or other persons occupying similar status or performing similar functions or a

person, directly or indirectly, controlling the franchise agent.

(b) The applicant's financial condition.

(c) The applicant's proposed form of doing business.

(d) Past misconduct on the part of the applicant or its partners, officers, or directors.

(e) Other information necessary for the protection of the public.

(2) An application for franchise agent registration shall be accompanied by a complete

fingerprint record of the partners, officers, and directors of the franchise agent who shall

be engaged in offers or sales of franchises in this state, the principal officer of the

franchise agent, and the compliance officer on a form prescribed by the administrator,

unless this requirement is waived or modified by the administrator.

History: 1979 AC.

R 445.703 Failure to complete, or withdrawal of, application.

Rule 703. If an applicant for franchise agent registration fails to complete, or withdraws,

an application within 3 months of the date of filing, the administrator may deny the

application. The administrator may deny a request to withdraw an application.

History: 1979 AC.

R 445.704 Denial, suspension, or revocation of registration.

Rule 704. The administrator may, by order, deny, suspend, or revoke a registration of a

franchise agent if the administrator finds that the order is in the public interest and the

applicant or registrant or a person directly or indirectly controlling the applicant or

registrant:

(a) Has filed an application for registration which, as of its effective date or as of any

date after filing in the case of an order denying effectiveness, was incomplete in a

material respect or contained a statement which was, in light of the circumstances

under which it was made, false or misleading with respect to a material fact.

(b) Has violated or failed to comply with the act, or a rule or an order under the act.

(c) Has been convicted of a misdemeanor involving moral turpitude, or of a felony.

(d) Is the subject of a final administrative order of a state or federal agency relating to,

or is permanently or temporarily enjoined by a court of competent jurisdiction from

engaging in or continuing any conduct or practice involving any aspect of, the securities,

franchise, real estate, or insurance business.

(e) Is the subject of an order of the administrator denying, suspending, or revoking

registration as a broker-dealer, agent, investment advisor, or franchise agent under part

6 or 7 of these rules or other similar registration.

(f) Is the subject of an order entered by the securities or franchise administrator of another

state, or by the securities and exchange commission, denying or revoking registration

as a broker-dealer, agent, or investment advisor, or the substantial equivalent of these

terms, or is the subject of an order of the securities and exchange commission

suspending or expelling that person from a national securities exchange or national

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securities association registered under the securities exchange act of 1934, or is the subject

of a United States post office fraud order.

(g) Has engaged in dishonest or unethical business practices, including, but not limited

to, the following practices:

(i) Recommending to a franchisee the purchase, sale, or exchange of a franchise without

reasonable grounds to believe that the recommendation is suitable for the person.

(ii) Acting as agent for both buyer and seller without fully disclosing the relationship

to both parties.

(iii) Charging the franchisee or franchisor more than a reasonable commission in

connection with the sale.

(iv) Personally borrowing money from a present or prospective franchisee.

(v) Effecting transactions not reported to the franchisor.

(vi) Operating an account under a name not registered with the administrator.

(vii) Representing to a franchisee that, as a condition of realizing significant earnings

from the franchise, the franchisee may have to recruit others who may likewise invest

in a franchise or distributorship, or require that the franchisee shall so recruit.

(h) Is insolvent, either because liabilities exceed assets or because obligations cannot

be met as they mature.

(i) Is not qualified on the basis of factors such as training, experience, or knowledge

of the franchise business.

(j) Has failed to supervise franchise agents in its employment as defined in part 6 to

insure that sales are made only to persons for whom the franchise is a suitable investment.

(k) Has failed to pay the proper filing fee. The administrator may enter only a denial

order under this subdivision, and it shall vacate the order when the deficiency has been

corrected.

History: 1979 AC.

R 445.705 Renewal of registration.

Rule 705. A franchise agent pursuant to this part may apply for renewal of its registration

by filing with the administrator a complete list of franchise agents pursuant to part 6

employed, including therewith current home and business addresses and telephone

numbers, a report of activities in the form designated by the administrator, and a

statement of financial condition prepared in accordance with generally accepted

accounting principles.

History: 1979 AC.

R 445.706 Records.

Rule 706. Every franchise agent pursuant to this part shall make and keep current the

following books and records relating to his business:

(a) Records of original entry detailing the sale of the franchise, to whom sold, the

aggregate price, the initial payment, the installment payments, if any, and the commission

paid to the franchise agent or its employees.

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(b) An individual registration record for each franchisee, including name, home and

business address, telephone numbers, occupation, aggregate amount paid, terms of

payment, and the name of its selling franchise agent employee.

(c) A copy of advertising used by the agent in the offer of franchises, including, but not

limited to, radio, newspapers, TV, letters and brochures.

(d) The records, books, and memoranda that relate to a franchise sale, and the records

required to be kept under the act and rules, for a period of not less than 6 years after the

sale.

History: 1979 AC.

R 445.707 Special financial reports.

Rule 707. The administrator may, at any time, require the filing of a special financial

report by a franchise agent if it finds that the filing is in the public interest.

History: 1979 AC.

R 445.708 Surety bond.

Rule 708. (1) A franchise agent whose net worth, derived by the use of generally accepted

accounting principles, does not exceed $100,000.00 shall file with the administrator a

surety bond in the amount of $25,000.00 on a form provided by the administrator, and

shall maintain the bond in that amount at all times while registered as a franchise agent.

(2) If a franchise agent fails to maintain the minimum net worth of $100,000.00, or fails

to file or to maintain its bond, the franchise agent shall immediately cease business and

notify the administrator of this failure.

(3) If a suit is brought to enforce liability on the bond, the franchise agent shall promptly

notify the administrator thereof. If the bond principal amount is reduced by any recovery

against it, the bond shall be immediately restored to $25,000.00.

(4) Prior to the disbursement of funds, a court shall require a claimant to publicize the

claim against the franchise agent's bond in a manner reasonably calculated to inform other

franchisees of the pendency of the action and to permit intervention and filing of claims.

(5) The bond shall also be for the use and benefit of persons who may have a cause of

action in this state by reason of embezzlement, defalcation, or misappropriation of

securities or funds by the principal, its agents, and employees.

(6) The administrator may exempt a registered franchise agent from this bond

requirement, or may vary its terms, only if justified and appropriate under special

circumstances.

History: 1979 AC.

R 445.709 Notification of agent's termination.

Rule 709. Within 7 days after an agent for a franchise agent terminates his employment

or is terminated, notice of termination shall be filed by the franchise agent on a form

prescribed by the administrator, setting forth fully the reasons for termination. If an agent

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is terminated for cause, including a violation of the act or rules, the notice shall set forth

the cause of termination.

History: 1979 AC.

R 445.710 Escrow account.

Rule 710. The franchise agent shall not receive funds from franchise sales or other

business conducted on behalf of the franchisor or subfranchisor. Payments from the sale

of a franchise shall be made only to an escrow account designated by the franchisor or the

subfranchisor for deposit.

History: 1979 AC.

PART 8. ADVERTISING

R 445.801 Contents of advertisement.

Rule 801. (1) Pursuant to section 24 of the act, advertising, as defined in section 2(1) of

the act, to be used to offer a franchise shall be filed in the office of the administrator in

duplicate not less than 10 business days prior to the publication.

(2) An advertisement shall not contain a statement or inference that a purchase of a

franchise is a safe investment or that failure, loss, or default is impossible or unlikely,

or that earnings or profits are assured.

(3) An advertisement, other than the offering prospectus used pursuant to section 6(1) or

6(2)(a) or (b) of the act, shall not contain a projection of future franchisee earnings, unless

the projection is:

(a) Based on a past earning record, over a reasonable period of time, of all franchisees

operating under conditions, including location, substantially similar to conditions affecting

the franchise being offered, including terminations, cancellations, reacquisitions,

nonrenewals, and other operational failures, together with existing operational franchise

data.

(b) For a reasonable period only.

(c) Substantiated by data which clearly supports the projection.

(d) Accompanied by a chart showing the estimated break-even point of the franchise

operation.

(e) Accompanied by appropriate caveats relating to the projection.

(f) Based upon reasonable assumptions clearly set out immediately adjacent to the

projection.

(4) An advertisement shall contain the name and address of the person responsible for

sponsoring or placing the advertisement, and shall identify the franchisor.

(5) If the advertisement contains an indorsement or recommendation of the franchise by

a public figure, whether express or implied, the advertisement shall state that the celebrity

has received, or shall receive, consideration to indorse this franchise, unless the name of

the celebrity appears in the title of the franchise and the title is prominently disclosed.

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(6) An advertisement of a franchise offered pursuant to exemptions under section 6(2)(c),

(d), (e), (f), (g), (h), (j), or (k) of the act shall disclose fairly and accurately the relevant

facts concerning the liabilities created thereunder as are necessary to make the

advertisement not misleading in light of the advertising and other material to be furnished

by the franchisor to the franchisee prior to the sale of the franchise.

(7) An advertisement which refers to a registered franchise under section 6(1), or to an

exempted franchise under section 6(2)(a) or (b) of the act, shall contain, in letters of not

less than 8-point type, the following legend:

"PURSUANT TO THE MICHIGAN FRANCHISE INVESTMENT LAW, SALES

MAY NOT BE MADE UNLESS A PROSPECTUS HAS BEEN DELIVERED 1 WEEK

PRIOR TO ENTERING INTO A FRANCHISE AGREEMENT OR PAYING

CONSIDERATION."

(8) The franchisor shall disclose in any advertising placed in the communications media

the required total initial and deferred franchise fee, or range of fees.

History: 1979 AC.

R 445.802 Exempt communications; contents.

Rule 802. (1) A notice, circular, or other communication which is published or transmitted

only after a registration or exemption pursuant to section 6(2)(a) or (b) of the act need

not be filed with the administrator if the franchise is effective and the notice, circular,

or communication contains only the statements required or permitted to be included therein

by the following provisions of this rule.

(2) A communication shall include, subject to the requirements of these rules, the

following items of information which need not follow the numerical sequence of this

subrule:

(a) The name of the franchisor.

(b) An identification of the type of business to be conducted by the franchisee.

(c) The total initial and deferred franchise fee required to be made on a franchise purchase

or, if the amount of the fee varies, the method of its determination or the probable price

range.

(d) The name and address of the sender of the communication.

(e) The logotype or symbol of the franchisor, if desired by the franchisor.

(f) A statement, in letters of not less than 8-point type, that:

"PURSUANT TO THE MICHIGAN FRANCHISE INVESTMENT LAW, SALES

MAY NOT BE MADE UNLESS A PROSPECTUS HAS BEEN DELIVERED 1 WEEK

PRIOR TO ENTERING INTO A FRANCHISE AGREEMENT OR PAYING

CONSIDERATION."

(g) The correct legal name and address of the individual or organization from whom an

offering prospectus may be obtained.

(3) A franchisor making an offer in reliance upon the exemptions of section 6(2)(e) or (f)

of the act need not file advertising with the administrator unless this exemption is

revoked by order of the administrator.

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History: 1979 AC.

R 445.803 False, fraudulent, misleading, and deceptive advertising.

Rule 803. (1) The following practices shall constitute, without limitation, false,

fraudulent, misleading, and deceptive advertising in connection with the offer or sale of a

franchise:

(a) Failure to disclose in any communications media advertising the required total initial

and deferred franchise fee for the franchise, or misrepresent, in any way, the fee.

(b) Misrepresentation of the training or management assistance available to the

franchisee. The failure to disclose that little or none is provided, unless this requirement

is waived by the administrator, constitutes a misrepresentation.

(c) Misrepresentation or causing confusion or misunderstanding regarding the source,

sponsorship, approval, or certification of franchised goods or services.

(d) Dissemination of an advertisement in a language other than English without including

therein the required disclosures or limitations on the offer advertised in the language

principally used in the advertisement.

(e) Obtaining leads to prospective franchisees by placing classified advertisements

designated or captioned "men wanted to train for . . . ," "help wanted," "employment,"

"business opportunities," or by words or terms of similar import, so as to represent directly

or by implication that employment is being offered when, in fact, it is not.

(f) Designation or reference to sale representatives as "registrars," "counselors,"

"advisors," or words of similar import that misrepresent, in any manner, the titles,

qualifications, training, experience, or status of salesmen, agents, employees, or other

representatives.

(g) Representation in an advertisement that a person receive goods or services "free,"

"without charge," or any other term of similar import when the product or service is not,

in fact, free.

(2) An advertisement of a guarantee or warranty relating to the sale of franchised goods

and services to the franchisee, or relating to the repurchase of the goods, shall clearly and

conspicuously disclose the following:

(a) The nature and extent of the guarantee, including disclosure of the following:

(i) The product or service being guaranteed.

(ii) The characteristics or properties of the designated product or service covered by or

excluded from the guarantee.

(iii) The conditions one claiming under the guarantee shall meet before the guarantor will

fulfill its obligation under the guarantee.

(b) The manner in which the guarantor will perform.

(c) The identify of the guarantor.

(3) A franchisor shall not advertise or represent that a product is guaranteed, or that it

shall repurchase the product for a specified price, when it cannot promptly fulfill its

obligations under the guarantee.

(4) Deceptive price advertising in connection with the offer or sale of a franchise includes,

among other practices, the following:

(a) Falsely representing, in any manner, that goods or services are offered for sale at a

reduction.

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(b) Representing that prices being charged are a reduction by "comparing" prices of

goods of like kind and quality, where the comparison being made is not with other goods

of essentially similar quality, obtainable in the area, and at an established price.

(c) Advertising a special price or limited offer to persons when, in fact, the offer is not

limited and is being made to many persons on a mass advertising or marketing basis, or

when the price is the same as that charged to those occupying a status similar to that of a

franchisee.

History: 1979 AC.

R 445.804 Modification and republication of advertisement.

Rule 804. The administrator may, by order, require modification of an advertisement

deemed false, fraudulent, misleading, or deceptive, and may require, prior to publication

of a subsequent advertisement, publication of an advertisement in all media previously

used by the franchisor, retracting the prior advertisement. A retraction, in language

approved by the administrator, shall be in an advertisement at least as large as that

originally used, and shall be as prominently displayed in the media as previously

advertised.

History: 1979 AC.

PART 9. DECEPTIVE OR FRAUDULENT PRACTICES

R 445.901 Enumeration of deceptive or fraudulent practices.

Rule 901. Deceptive or fraudulent practices committed, directly or indirectly, in

connection with the offer, sale, or purchase of a franchise include, but are not limited to,

the following practices:

(a) Misrepresentation of, or failure to disclose, the required total initial and deferred

franchise fee for the franchise.

(b) Misrepresentation of the training and management assistance available to the

franchisee, or failure to disclose that little or none is available.

(c) Misrepresentation or failure to disclose that the franchisor does not have significant

experience in the sale of the franchised product or service in this state.

(d) Failure to disclose that the franchisor does not have material information about the

existence of a market for the product or service, if such is the case, or misrepresentation

of that information.

(e) Misrepresentation of, or failure to disclose, the franchisor's efforts to sell or establish

more franchises than it is reasonable to expect the market or market area for the particular

franchise to sustain.

(f) Misrepresentation of the quantity or quality of the products or services to be sold or

distributed through the franchise.

(g) Misrepresentation, or causing confusion or misunderstanding, regarding the source,

sponsorship, approval, or certification of franchised goods or services.

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(h) Representation that goods are new if they are deteriorated, altered, reconditioned,

used, or secondhand, or failure to disclose such a condition.

(i) Misrepresentation of the number of franchisees the franchisor shall appoint or

designate to operate within a given territory or shall locate within a given territory, or

representation that a franchisee shall be or is the only franchisee appointed or located

within a specified franchise territory when, in fact, the franchisee is not.

(j) Misrepresentation by failure to disclose, or otherwise, the termination, cancellation,

reacquisition, transfer, or renewal provisions of a franchise agreement.

(k) Falsely claiming or inferring that a primary marketer, other than franchisor of

trademark products or services, sponsors or participates directly or indirectly, in the

franchise operation, or that the offeror has an affiliation, or connection with, or is

attributed some special status by, the marketer.

(l) Representation that locations for the franchised business, facilities, machines, or

other devices are secured, or shall be secured, by the franchisor when, in fact, they are not

or shall not be.

(m) Representation that machines, equipment, products, or displays of a brand or kind

are of a specific ability or nature when, in fact, they are not.

(n) Misrepresentation or failure to disclose that a person is being offered a franchise

in a business, trade, or profession which requires a registration or license to conduct.

(o) Representation, in any manner, that goods or services are offered for sale at a reduced

price when they are not.

(p) Representation of a reduction of prices charged by "comparing" prices of goods of

like kind and quality, where the comparison being made is not with other goods of

essentially similar quality and obtainable in the area.

(q) Representing a special price or limited offer to persons when, in fact, the offer is not

limited and is being made to many persons on a mass advertising or marketing basis, or the

price is the same as that charged to those occupying a status similar to that of the franchisee.

History: 1979 AC.

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