USL not meeting franchisor requirements in some states
The United Soccer League (USL) has continued its expansion through successful D2 expansion as well as its soon-to-be-launched USLD3 division with a rumored 8-12 teams. However, lapses in franchise registration filings in a number of states may pose a problem for the league’s expansion hopes. Soc Takes has learned that the USL currently lacks up-to-date franchise registrations in 12 states, including several locations where USL announcements are expected in coming years.
The USL is a registered franchisor that offers franchises across the United States. Thirteen states require franchisors to meet annual registration requirements in order to maintain active status as franchisors in those states. These requirements include paying a nominal fee and/or filing annual franchise disclosure documents (FDD). This only applies to new franchises, and does not affect the status of existing franchises.
These FDDs reveal critical details about how the franchise of interest operates (in this case, the USL), in accordance with the “Franchise Rule” as stated by the Federal Trade Commission (FTC) including manuals and audited financial disclosures.
According to the FTC, “the Franchise Rule gives prospective purchases of franchises the material information they need in order to weigh the risks and benefits of such an investment. The Rule requires franchisors to provide potential franchises with a disclosure document containing 23 specific items of information about the offered franchise, its officers and other franchisees.”
Put simply, these required documents inform potential investors if the franchise is a good financial and ethical decision.
The USL has been filing publicly available documents annually since 2010 in most of these states. Yet, for an unknown reason, the USL stopped filing FDDs in all but one state since 2017.
And as a result of this cessation of filing, the USL is currently not an active franchisor in 12 out of the 13 states requiring those documents. Without active franchisor status, USL cannot offer new franchises in many of these states.
Soc Takes contacted each state department to better understand the USL’s status.
EXEMPTIONS
One work-around for franchisors is to seek one of a myriad of exemptions. These exemptions allow successful franchisors to not file annual FDDs if they meet certain metrics. These metrics include a high net worth of the franchisor (in this case, the USL) and/or the parent company (in this case, NuRock). However, as indicated below, in many cases, even filing under exemptions requires submission of paperwork.
Soc Takes was unable to determine whether the USL and/or NuRock met exemption requirements. Though, it must be recognized that the league has been operating under significant profit recently.
STATES REQUIRING FDDs
The states requiring FDDs are: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, Virginia, Washington and Wisconsin. Out of these states, Soc Takes has learned, via online searches and phone calls made to respective regulatory agencies, that the USL is currently an active franchisor only in the state of Wisconsin.
Interestingly, neither the now-dormant North American Soccer League (NASL) nor Major League Soccer (MLS) count as franchisors, while the USL does. The reason is that MLS owns all its teams, while the USL does not. On the other hand, the NASL did not operate as a franchisor, as independent owners controlled and owned the league as opposed to the reverse.
STATE BY STATE
Here is a state-by-state summary of the same:
California – USL has not been an active franchisor in the state of California since 2017. Their last filing was in March 2016. Yet, On WRALSports, Jake Edwards spoke about multiple California teams who were interested in USLvD3. Additionally, discussions have taken place about USL teams in Walnut Creek, San Francisco and San Diego.
Hawaii – No filing on record.
Illinois – Correspondence with the office of the Illinois Attorney General revealed that the USL’s status (File No. 537-16) has been inactive since April 2017. A representative at the office said that even if the USL were offering franchises under an exemption, they would have to indicate that they were doing so via filed paperwork to the Office of the Attorney General. Chicago is expected to be a site of future USL expansion.
Indiana – Correspondence with Indiana’s Secretary of State revealed that the USL’s status as a franchisor in Indiana expired in October 2016. The Indy XI joined the USL as a new franchise team in January 2018. It is possible that the USL could offer franchises under one of the many exemptions under Indiana’s code title 23. One of those exemptions allows a single franchise in a 24-month period to be offered without FDD filing. Indy XI was the only franchise offered during that time, although discussions about USLD3 expansion to Lafayette and Evansville have emerged.
Maryland – The USL’s active status expired in January 2016, per a phone call to Maryland’s Securities Division. A representative suggested that the USL would need to file a request for exemption in order to file under any exemption laws. The USL has not started new franchises in Maryland since expiration, though rumors of a Baltimore franchise have long persisted.
Michigan – The USL’s status in Michigan has been inactive since Oct. 6, 2016. A representative at Michigan’s Attorney General’s office was unable to determine whether the USL could file under any exemption law. The USL has not publicly offered franchises in Michigan since expiration. Meanwhile, USLD3 has been linked with a possible expansion into Lansing.
Minnesota – In an interview with The Athletic Soccer’s Jeff Rueter, Minnesota United FC owner Bill McGuire discussed the difficulties associated with getting a USL franchise off the ground. One additional problem may include the fact that the USL’s status with Minnesota’s Department of Commerce was canceled on June 30, 2017. A copy of the publicly available letter of cancellation can be found above.
A representative for Minnesota’s Department of Commerce informed Soc Takes that the USL would need to file a document to claim an exemption, and that in order to become an active registrant once more, it would need to file a new application. He intimated that review of any new applications would take at least two months.
As things stand, USL-Minnesota is not happening any time soon.
New York – Inactive since Feb. 21, 2017. A representative at the Office of the Attorney General suggested that exemptions allow a franchisor to offer franchises without filing FDDs if the franchisor is worth $3 million and they file a letter of “consent of service” through the secretary of state. The USL has not publicly offered new franchises in New York since 2017.
North Dakota – The USL’s franchisor status expired on May 15, 2017. An exemption letter would need to be filed in order for the league to offer franchises, per a representative at North Dakota Securities Department. The USL has not publicly offered franchises in North Dakota since that time.
Rhode Island – Status has been expired since April 2017. The USL has not publicly offered franchises in Rhode Island since that time.
Virginia – Status expired in 2015. A senior examiner at the Examination Section of the State Corporate Commission clarified that while exemptions are offered in the state, all exemptions require franchisors to file a specific form (Form H). The senior examiner said there was no Form H filed by the USL. Recently, Loudoun United was announced as an affiliate of D.C. United, and will begin play in the 2019 season.
Washington – The USL’s status expired in 2015. A representative of the Department of Financial Institutions in Washington informed Soc Takes that they do not have any system to track exemptions. Therefore, theoretically, the USL could continue to offer franchises in the state without the knowledge of the state even though they are not active franchisors. The USL has not publicly offered franchises in Washington since that time.
Wisconsin – The USL’s status in Wisconsin expired on March 2017, but the league re-activated their status on July 24, 2018 at the Wisconsin Department of Financial Institutions. Madison-USLD3 was announced as an expansion team in May 2018.
Therefore, as things stand, the USL is unable to offer franchises in multiple states. None of this, however, prevents them from offering franchises in non-FDD-requiring states. But, it does seem to suggest that potential teams in Baltimore, Minnesota, California, etc., may not happen anytime soon. Additionally, it remains unclear why the USL stopped filing FDDs and allowed inactivation of their status as state-approved franchisors. Finally, it is unclear which, if any, exemptions were used by the USL to announce Indy XI and Loudoun United as franchisees in 2018.
A USL spokesperson responded to the information revealed in this article:
“For USL and USL Division III, we have submitted registrations (or equivalent required notices/exemptions) in accordance with applicable state law.
Note that, in the case of Indiana, state law only requires registration when the franchisor sells more than one franchise within the state within one 24-month period. Should it be necessary, we will register in Indiana in due course.
Additionally, we intentionally let our Minnesota registration expire in 2017 because at the time we were not planning to sell any franchises in that state in 2018 or 2019.
As we turn toward new expansion markets for 2020, additional state registrations will be submitted as required by state law.”
Amongst other things, USL’s statement does not clarify how USL were able to announce a Madison franchise before actively registering in Wisconsin, and how they were able to announce Loudoun United without filing form H in the state of Virginia.
Neil Morris, Wes Burdine and Kartik Krishnaiyer contributed to this story.
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