Sec. 02.02.08.08. Escrow Condition  


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  • A. Imposition of Escrow Condition. At any time after the submission of a registration statement and upon a finding that it is necessary and appropriate for the protection of prospective franchisees or subfranchisors, the Commissioner may require a franchisor to escrow franchise fees and other funds paid by a franchisee or subfranchisor until the franchisor's obligations under the offering have been satisfied.

    B. Depositary. Funds subject to an escrow condition shall be placed in a separate trust account with a national bank located in Maryland or a Maryland bank or trust company.

    C. Compliance with Escrow Condition. After the Commissioner imposes an escrow condition, the franchisor shall file with the Commissioner the following:

    (1) An original fully executed copy of the escrow agreement;

    (2) A written consent from the depositary agreeing to operate the escrow account under this regulation;

    (3) The name and address of the depositary and the account number of the escrow account;

    (4) The name, address, and telephone number of an individual or individuals at the depositary who may be contacted by the Commissioner regarding the escrow account; and

    (5) An amended franchise registration application reflecting, in both the franchise agreement and Item 5 of the offering circular, that the Commissioner has imposed the escrow conditions and the material terms of that escrow condition, including the name of the depositary.

    D. Operation of Escrow Condition. After the Commissioner imposes an escrow condition:

    (1) Franchisee and subfranchisor checks for franchise fees or other payments to the franchisor shall be made payable to the depositary;

    (2) Franchise fees and all other funds to be paid to the franchisor by its franchisees or subfranchisors for any purpose shall be placed, within 48 hours of the receipt of those funds, with the depositary; and

    (3) Funds placed in the depositary shall remain escrowed until the Commissioner authorizes the release of the funds under §E of this regulation.

    E. Release of Escrowed Funds.

    (1) A franchisor may apply to the Commissioner for the release of escrowed funds.

    (2) A franchisor's application to the Commissioner to authorize the release of escrowed funds to the franchisor shall be in writing, verified by an authorized officer of the franchisor and shall contain:

    (a) A statement by the franchisor that all proceeds from the sale of franchises have been placed with the depositary in accordance with the terms and conditions of the escrow condition;

    (b) A statement of the depositary, signed by an appropriate officer, setting forth the aggregate amount of escrowed funds deposited with the depositary and the franchisor's account number with the depositary;

    (c) A list of the franchisees and subfranchisors and the amount held in the escrow account for the account of each franchisee and subfranchisor;

    (d) With respect to each franchisee for which the release of funds is sought, the amount of funds sought to be released and a written certification from the franchisee stating the amount of funds to be released and acknowledging that the franchisor has completely performed its obligations under the franchise agreement to provide real estate, improvements, equipment, inventory, training, or other items; and

    (e) Other information the Commissioner may reasonably require.

    (3) If the Commissioner finds that the franchisor has fulfilled its obligations under the franchise agreement to a specified franchisee or subfranchisor, the Commissioner shall authorize the depositary to release to the franchisor those amounts of the escrowed funds applicable to the franchisee or subfranchisor.

    F. Surety Bond in Place of Escrow.

    (1) Instead of the imposition of an escrow condition, a franchisor may post a surety bond in an amount required by the Commissioner.

    (2) The bond shall be:

    (a) In an amount not less than the initial franchise fee multiplied by the number of franchises the franchisor estimates it will sell in the State in the next year;

    (b) Issued by a corporate surety authorized to transact business in Maryland; and

    (c) Conditioned upon the completion by the franchisor of its obligations under the franchise agreement to provide real estate, improvements, equipment, inventory, training, or other items.

    G. Deferral of Fees in Place of Escrow.

    (1) Instead of the imposition of an escrow condition, the Commissioner may, in appropriate circumstances, accept a franchisor's agreement to defer franchise fees and other initial payments owed by franchisees and subfranchisors until the franchisor has completed its initial obligations under the franchise agreement.

    (2) The franchisor's agreement to defer franchise fees shall be reflected in the offering circular and the franchise agreement.

    H. Removal of Escrow Condition. At any time after the imposition of an escrow condition, the Commissioner may remove the escrow condition if:

    (1) The franchisor posts a surety bond in accordance with §F of this regulation;

    (2) The franchisor agrees to defer franchise fees and other initial payments in accordance with §G of this regulation; or

    (3) Based upon new information, the Commissioner finds that the escrow condition is no longer necessary and appropriate for the protection of prospective franchisees.