On April 29, 2021, the National Assembly passed an amendment (the “Proposed Amendment”) to the Fairness in Franchise Transactions Act (the “FFTA”) proposed by the Korea Fair Trade Commission (the “KFTC”). The Proposed Amendment was officially announced on May 18, 2021 and will become effective from November 19, 2021.
Concerns that solicitation by companies without a sustainable franchise business model is putting prospective franchisees at a high risk of losing investment have increased recently. In response, the KFTC put forward the Proposed Amendment to protect prospective franchisees from being solicited by poorly managed franchise chains or franchise business models that have not been verified as sustainable.
There are two key aspects of the Proposed Amendment: (i) requirement of franchisor’s prior experience in operating a directly-managed store, and (ii) reduction in the scope of exemptions for small-scale franchisors.
1. Requirement of Franchisor’s Prior Experience in Operating Directly-Managed Stores
The Proposed Amendment prohibits a company with less than one year of experience in operating a directly-managed store from newly registering a disclosure statement as a franchisor, effectively preventing it from soliciting franchisees. However, this will not apply to franchisors who have already registered a disclosure statement with the KFTC and companies whose business model has already been verified as sustainable (e.g., by earning a separate license or qualification). In addition, the proposed amendment to the Enforcement Decree of the FFTA, which went through a pre-announcement period from June 28, 2021 to August 9, 2021, sets forth additional exceptions to the obligation to operate directly operated stores as follows: (i) an entity that has obtained a license or permit under other laws and regulations; (ii) an entity that has experience in operating the same type of business in or outside Korea for at least one year; and (iii) other similar cases.
Further, under the Proposed Amendment, companies will be required to include their experience in operating directly managed stores (e.g., operation period and sales revenues) in their disclosure statements, and provide such information to prospective franchisees at the recruitment stage.
2. Reduction in Scope of Exemptions for Small-Scale Franchisors
As it is more challenging for small-scale franchisors to access market information on its franchise business and to return the franchise fee to franchisees when required (i.e., upon termination of the franchise agreement), the Proposed Amendment reduces the scope of exemptions for the small-scale franchisors. Under the Proposed Amendment, franchisors of all sizes are to register disclosure statements, provide disclosure statements to prospective franchisees, and have franchisees pay franchise fees in the form of deposits at a designated deposit agency.
Once the Proposed Amendment becomes effective, companies or small-scale franchisors that are planning a new franchise business may need to satisfy additional requirements set forth in the Proposed Amendment to protect the prospective franchisees. Therefore, it would be crucial for these companies and franchisors to carefully review and analyze the details of the amended FFTA before starting their business. Further, as for those who are already engaged in franchise business, we recommend staying updated on the recent policy trends related to the Proposed Amendment.
