37-5B-1      Definitions.
37-5B-2      Jurisdiction.
37-5B-3      Offer or sale not made in state.
37-5B-4      Notice filing required.
37-5B-5      Notice filing provisions.
37-5B-6      Amendments.
37-5B-7      Updating disclosure documents.
37-5B-8      Start-up financial statements.
37-5B-9      Phase-in of financial statements.
37-5B-10      Negotiation of terms.
37-5B-11      Signed receipt.
37-5B-12      Exemptions from chapter.
37-5B-13      Exemptions from notice filing and obligations to deliver disclosure document.
37-5B-14      Exemptions from notice filing.
37-5B-15      Exemptions by director.
37-5B-16      Thresholds.
37-5B-17      Delivery of disclosure document.
37-5B-18      Time of delivery of disclosure document.
37-5B-19      Books and records.
37-5B-20      Burden of proof.
37-5B-21      Arbitration.
37-5B-22      Consent to service of process.
37-5B-23      Advertisement.
37-5B-24      Fraud--Class 4 felony.
37-5B-25      Fraud--Class 6 felony.
37-5B-26      Prohibited practices.
37-5B-27      Director approval not permitted.
37-5B-28      Administration.
37-5B-29      Promulgation of rules.
37-5B-30      Opinions.
37-5B-31      Filed documents.
37-5B-32      Records of filings and orders.
37-5B-33      Public and nonpublic records.
37-5B-34      Copies of notice filings and orders.
37-5B-35      Investigations.
37-5B-36      Request for information.
37-5B-37      Subpoena powers.
37-5B-38      Immunity.
37-5B-39      Unauthorized use of information--Misdemeanor.
37-5B-40      Cooperation with other agencies.
37-5B-41      Cease and desist orders.
37-5B-42      Order to show cause.
37-5B-43      Civil penalty.
37-5B-44      Order or request for hearing.
37-5B-45      Effect of order without hearing.
37-5B-46      Affirmance, modification, or vacation of order.
37-5B-47      Civil action by attorney general.

37-5B-1. Definitions.

Terms used in this chapter, 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 Insurance;

(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 chapter 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.

Source: SL 2008, ch 203, § 1; SL 2017, ch 231 (Ex. Ord. 17-2), § 19, eff. Apr. 13, 2017.

37-5B-2. Jurisdiction.

This chapter 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.

Source: SL 2008, ch 203, § 2.

37-5B-3. Offer or sale not made in state.

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 chapter.

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 chapter.

Source: SL 2008, ch 203, § 3.

37-5B-4. Notice filing required.

It is unlawful for any person to offer or sell a franchise in this state unless the franchise has properly notice filed under this chapter or is exempt from notice filing pursuant to §§ 37-5B-12 to 37-5B-15, inclusive.

Source: SL 2008, ch 203, § 4.

37-5B-5. Notice filing provisions.

An initial application for the notice filing of a franchise shall be made by filing with the director of the Division of Insurance 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 § 37-5B-41 or 37-5B-48 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 § 37-5B-6 or 37-5B-36, and if no order or injunction pursuant to § 37-5B-41 or 37-5B-48 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 chapter 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 chapter 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 Insurance's 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.

Source: SL 2008, ch 203, § 5; SL 2017, ch 231 (Ex. Ord. 17-2), § 19, eff. Apr. 13, 2017.

37-5B-6. Amendments.

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.

Source: SL 2008, ch 203, § 6.

37-5B-7. Updating disclosure documents.

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.

Source: SL 2008, ch 203, § 7.

37-5B-8. Start-up financial statements.

For the purposes of § 37-5B-7, 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.

Source: SL 2008, ch 203, § 8.

37-5B-9. Phase-in of financial statements.

For the purposes of § 37-5B-7, 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.

Source: SL 2008, ch 203, § 9.

37-5B-10. Negotiation of terms.

This chapter 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.

Source: SL 2008, ch 203, § 10.

37-5B-11. Signed receipt.

The person offering or selling any franchise subject to the requirements of §§ 37-5B-17 and 37-5B-18 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.

Source: SL 2008, ch 203, § 11.

37-5B-12. Exemptions from chapter.

The following are exempt from this chapter:

(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.

Source: SL 2008, ch 203, § 12.

37-5B-13. Exemptions from notice filing and obligations to deliver disclosure document.

The following franchises are subject to this chapter but are exempt from §§ 37-5B-4 and 37-5B-17, 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 a personal representative, 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.

Source: SL 2008, ch 203, § 13.

37-5B-14. Exemptions from notice filing.

The following franchises are subject to this chapter but are exempt from § 37-5B-4 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.

Source: SL 2008, ch 203, § 14.

37-5B-15. Exemptions by director.

The director may by rule or order exclude the offer and sale of a franchise from the requirements of §§ 37-5B-4 and 37-5B-17 if the filing or disclosure is not necessary or appropriate in the public interest or for the protection of prospective franchisees.

Source: SL 2008, ch 203, § 15.

37-5B-16. Thresholds.

For purposes of the exemptions set forth in subdivision 37-5B-12(5) and subdivisions 37-5B-13(1) and (2), the director may adjust by rule or order the size of the thresholds.

Source: SL 2008, ch 203, § 16.

37-5B-17. Delivery of disclosure document.

In connection with the offer or sale of a franchise in this state, unless the transaction is exempted by the provisions of §§ 37-5B-12 to 37-5B-16, inclusive, it is a prohibited practice and a violation of this chapter 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.

Source: SL 2008, ch 203, § 17.

37-5B-18. Time of delivery of disclosure document.

For purposes of subdivisions 37-5B-17(1) and (2), 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.

Source: SL 2008, ch 203, § 18.

37-5B-19. Books and records.

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.

Source: SL 2008, ch 203, § 19.

37-5B-20. Burden of proof.

In any proceeding under this chapter the burden of proving an exemption is upon the person claiming it.

Source: SL 2008, ch 203, § 20.

37-5B-21. Arbitration.

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 chapter or a rule or order under this chapter is void.

Source: SL 2008, ch 203, § 21.

37-5B-22. Consent to service of process.

Each applicant for notice filing under this chapter, 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 or personal representative, which arises under this chapter 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 or personal representative.

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 chapter, 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 or personal representative which grows out of that conduct and which is brought under this chapter, 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.

Source: SL 2008, ch 203, § 22.

37-5B-23. Advertisement.

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.

Source: SL 2008, ch 203, § 23.

37-5B-24. Fraud--Class 4 felony.

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.

Source: SL 2008, ch 203, § 24.

37-5B-25. Fraud--Class 6 felony.

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 chapter 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 chapter; 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 chapter.

A violation of this section is a Class 6 felony.

Source: SL 2008, ch 203, § 25.

37-5B-26. Prohibited practices.

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 § 37-5B-17, 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.

Source: SL 2008, ch 203, § 26.

37-5B-27. Director approval not permitted.

The director may not approve or express any opinion on the legality of any matter a franchisor may be required to disclose under this chapter.

Source: SL 2008, ch 203, § 27.

37-5B-28. Administration.

The director shall administer this chapter.

Source: SL 2008, ch 203, § 28.

37-5B-29. Promulgation of rules.

The director may promulgate rules pursuant to chapter 1-26 to carry out the provisions of this chapter including forms governing disclosure documents, applications, financial statements, and defining any terms, whether or not used in this chapter, if the definitions are not inconsistent with this chapter. 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.

Source: SL 2008, ch 203, § 29.

37-5B-30. Opinions.

The director may, upon request and upon payment of a fee of fifty dollars, respond to requests for interpretive opinions relating to this chapter.

Source: SL 2008, ch 203, § 30.

37-5B-31. Filed documents.

A document is filed when it is received by the director.

Source: SL 2008, ch 203, § 31.

37-5B-32. Records of filings and orders.

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.

Source: SL 2008, ch 203, § 32.

37-5B-33. Public and nonpublic records.

Each application, notice and report filed with the director under this chapter 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 § 37-5B-35 is open to public inspection.

Source: SL 2008, ch 203, § 33.

37-5B-34. Copies of notice filings and orders.

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.

Source: SL 2008, ch 203, § 34.

37-5B-35. Investigations.

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 chapter or to aid in the enforcement of this chapter and in the prescribing of rules and forms under this chapter. The director may publish information concerning the violation of any rule, order, or provision under this chapter.

Source: SL 2008, ch 203, § 35.

37-5B-36. Request for information.

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.

Source: SL 2008, ch 203, § 36.

37-5B-37. Subpoena powers.

For the purpose of any investigation or proceeding under this chapter, 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 chapter 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.

Source: SL 2008, ch 203, § 37.

37-5B-38. Immunity.

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.

Source: SL 2008, ch 203, § 38.

37-5B-39. Unauthorized use of information--Misdemeanor.

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 chapter 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 chapter.

Source: SL 2008, ch 203, § 39.

37-5B-40. Cooperation with other agencies.

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.

Source: SL 2008, ch 203, § 40.

37-5B-41. Cease and desist orders.

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 chapter 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.

Source: SL 2008, ch 203, § 41.

37-5B-42. Order to show cause.

As an alternative to the procedure prescribed in § 37-5B-41, 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.

Source: SL 2008, ch 203, § 42.

37-5B-43. Civil penalty.

The director may impose a civil penalty against a person named in an order issued pursuant to subdivisions (1) to (3), inclusive, and subdivision 37-5B-41(6). 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 § 37-5B-44 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 37-5B-41(6), 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.

Source: SL 2008, ch 203, § 43.

37-5B-44. Order or request for hearing.

Upon the entry of an order pursuant to § 37-5B-41 without a hearing, the director of the Division of Insurance 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.

Source: SL 2008, ch 203, § 44; SL 2017, ch 231 (Ex. Ord. 17-2), § 19, eff. Apr. 13, 2017.

37-5B-45. Effect of order without hearing.

If no hearing is requested and none is ordered by the director, an order entered pursuant to § 37-5B-41 without a hearing shall remain in effect until it is modified or vacated by the director.

Source: SL 2008, ch 203, § 45.

37-5B-46. Affirmance, modification, or vacation of order.

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.

Source: SL 2008, ch 203, § 46.

37-5B-47. Civil action by attorney general.

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 chapter 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 § 37-5B-49.

Source: SL 2008, ch 203, § 47.

37-5B-48. Injunctive relief.

In addition to all other penalties and remedies provided by this chapter, 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 chapter, and may upon a proper showing appoint a receiver for the property, assets, business, and affairs of a franchisor.

Source: SL 2008, ch 203, § 48.

37-5B-49. Civil damages or rescission.

A person who violates any provision of this chapter 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 §§ 37-5B-4, 37-5B-7 to 37-5B-9, inclusive, or 37-5B-17, 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 chapter 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 chapter were not in effect.

Source: SL 2008, ch 203, § 49.

37-5B-50. Limitation of actions.

No person may obtain relief for an action pursuant to § 37-5B-49:

(1)    In an action for rescission pursuant to §§ 37-5B-4, 37-5B-7 to 37-5B-9, inclusive, or 37-5B-17 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.

Source: SL 2008, ch 203, § 50.

37-5B-51. Pending actions and actions based on prior conduct.

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.

Source: SL 2008, ch 203, § 52.

37-5B-52. Prior registrations and rulings.

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 chapter had not been enacted. They are considered to have been filed, issued, or imposed under this chapter, but are exclusively governed by chapter 37-5A as of June 30, 2008.

Source: SL 2008, ch 203, § 53.

37-5B-53. Prior offers and sales.

Chapter 37-5A as of June 30, 2008, exclusively applies to an offer or sale made within one year after July 1, 2008 pursuant to an offering made in good faith before July 1, 2008 on the basis of an exemption available under chapter 37-5A.

Source: SL 2008, ch 203, § 54.