This month, the Virginia State Corporation Commission (the “Commission”) released an order adopting changes to the Virginia Administrative Code’s rules governing the Virginia Retail Franchising Act (the “Rules”). The changes, which go into effect on January 1, 2025, will affect franchisors intending to register their franchise programs and offer and sell franchises in the Commonwealth of Virginia in the coming year. The changes include four main revisions to the existing Rules, all of which relate to the content or method of submitting franchise filings.

Requiring Electronic Submissions

The revisions require franchise registration, amendment and renewal applications to be submitted either electronically via a method approved by the Virginia Division of Securities and Retail Franchising, or on a CD-ROM in PDF format or other approved electronic media. Electronic applications, including Franchise Disclosure Documents, must be text searchable. However, the revisions allow for other forms of submission at the Commission’s discretion if a franchisor can show good cause. A franchisor wishing to submit an application using an alternative method must receive prior approval from the Commission.

Use of GAAP in Opening Balance Sheets

The revisions clarify that opening balance sheets submitted by start-up franchisors must be prepared “in accordance with generally accepted accounting principles.”

Permitting Surety Bonds as Financial Assurance

In lieu of escrow or deferral of franchise fees and other initial payments, the revisions permit franchisors to post a surety bond as a form of financial assurance. The amount of the surety bond must be not less than the initial franchise fee of one franchise unit, and at least equal to the initial franchise fee multiplied by the number of units signed by the franchisor in the Commonwealth of Virginia but not yet opened. The surety bond must also be conditioned upon the franchisor performing its obligations under the franchise agreement. The revisions also specify that the surety bond and its conditions must be disclosed in Item 5 of the Franchise Disclosure Document or in a Virginia addendum, and a copy of the bond must be submitted to the Commission.

Form L for Fee Deferrals

The revisions add a “Form L” titled “Certification of Deferred Franchise Fee – Franchise Registration/Renewal” to be used by franchisors electing fee deferral as a form of financial assurance. The form includes a certification that during the prior registration period the franchisor deferred the collection of franchise fees from locations to be operated in the Commonwealth of Virginia, and for the same registration period, disclosure of any franchise sold within the Commonwealth of Virginia, including dates when pre-opening obligations were met and when the franchise fee was received, along with other details about the sales.