Richard Gibson writes in the Wall Street Journal: Discouraged by economic conditions, some franchisers are cutting back on efforts to sell franchises.

Annual applications from franchisers who want to do business in Maryland are down significantly so far this year, says Dale Cantone, an assistant attorney general for the state. First-quarter franchise-registration applications in Maryland fell 16% from a year earlier to 367.

Other states report similar falloffs. For instance, California’s filings from Jan. 1 through its April 20 deadline fell nearly 20% from a year earlier to 769. New York’s first-quarter registrations dropped 22% to 348 — the lowest number in five years.

Attorneys who process state registrations confirm the pattern.

“Historically, [franchisers] have said ‘Register me everywhere,’ but in the current environment they’re being more selective” about what states to register in, says Bret Lowell, a partner who handles franchising matters at DLA Piper LLP, a Reston, Va., law firm.

The pullback comes after several years of increased filings as franchisers of everything from pizza parlors to pet groomers aggressively sought applicants to expand their chains. “To me, it’s the effect of problems in getting financing,” says Timothy O’Brien, chief examiner in Virginia’s division of securities and retail franchising, which oversees franchised businesses. He adds that registrations by franchisers seeking to solicit franchisees for the first time in Virginia are off by nearly 100 from a year earlier, to 296 from 394.

“We’re not seeing as many new brands applying as we did last year,” he says.

State authorities declined to say which franchisers hadn’t filed with them this year.

Jeff Elgin, chief executive of FranChoice Inc., an Eden Prairie, Minn., firm that helps franchisers find prospective franchisees, says, “A lot of companies entered the franchising business the last three or four years, and many haven’t been doing very well recruiting franchisees.” In part, he says, that is because many would-be franchisees “who nine months ago would have gotten financing very easily are being held up.”

Fourteen states require franchisers to register to obtain permission to sell franchises within their borders: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin.

In other states, franchisers simply must have a federally mandated disclosure document containing financial statements, fees, recent litigation and other factors to help prospective franchisees assess the business. States that require registrations also mandate that franchisers have a disclosure prospectus.

Meanwhile, several states — among them Illinois, New York and Washington — give large, mature franchisers what is sometimes called a big-boy exemption from full registrations because they have a significant net equity, which is assets minus liabilities. But this year, some franchisers lost their exemption and had to reregister because their net equity had slipped below the required minimum.

In Maryland, for instance, one established franchiser lost its exemption after the goodwill on its balance sheet shrank — “an indication of the current economic conditions,” the company told the state in a letter accompanying its application, according to Mr. Cantone. In North Dakota, a fast-food restaurant operator, a real-estate firm and a home-remodeling franchiser lost their exemption status this year and had to reregister, says Diane Lillis, franchise examiner in that state’s securities department.

Wall Street Journal