NASAA Proposes Major Changes to Franchise Disclosure Document Cover Page – Comments Are Due This Week

07/06/2018 / Chuck Modell

On June 12, the North American Securities Administrators Association (NASAA) issued a proposal to revise the state cover page to Franchise Disclosure Documents (FDDs), essentially adding several pages to the beginning of the FDD. While we do not believe most franchisors would object to inclusion of the new materials in their FDD, franchisors (and others) have until the end of this week to submit comments to the proposed revisions. 

The proposal to expand the cover page requirements can be found at http://www.nasaa.org/wp-content/uploads/2018/06/Frachise-State-Cover-Sheets-Proposal-Public-Comment-06122018.pdf. The changes will not be difficult to implement, because most of the changes involve adding three very specific, required pages to the beginning of the FDD. The pages are intended to highlight for prospective franchisees certain risks inherent in the purchase of any franchise, as well as some of the differences between a franchised business and an independent business. While some franchisors may be concerned that these admonitions will “scare away” prospective franchisees, we believe these disclosures will provide franchisors added protection against subsequent claims by franchisees.

For example, one section highlights that upon expiration of the term of the franchise, there may not be a right to renew the franchise, and if there is, the franchisee may have to sign a new agreement with different terms and conditions. That disclosure is essentially already in Item 17 of the FDD, and in the franchise agreement, but franchisees still raise issues of unfairness on renewal. Highlighting the requirement on the cover page should make it much more difficult for franchisees to make legal arguments against their franchisors over this issue. We therefore support the inclusion of these additional pages in FDDs. We also believe most of our clients will welcome them, if not at the outset, certainly if litigation threats are made by franchisees and we can show a judge that these issues were explained and highlighted before the franchisee ever signed the franchise agreement. Also, the required pages do not harm or benefit any particular franchisor, as all franchisors would be required to include these initial pages with the same warnings and recommendations. A prospective franchisee comparing multiple franchised brands would see these warnings and recommendations in all FDDs.

Although we do generally support this project, there are some provisions of the proposal that we believe are in error, or can be improved. We, therefore, submitted a comment letter to NASAA regarding the adoption of these disclosures. We would also encourage all our newsletter recipients to look at the proposed changes and, if you find provisions that are objectionable, consider submitting your own comment letter to NASAA. However, if you do want to submit a comment letter, you need to do so by the end of this week. If you click on the link for the notice, http://www.nasaa.org/wp-content/uploads/2018/06/Frachise-State-Cover-Sheets-Proposal-Public-Comment-06122018.pdf, the first page will tell you to whom your comments should be sent.

Finally, note that the proposed changes are not currently in effect, and no franchisor should be following this format today. At best, the proposed changes will be adopted in September 2018, and existing franchisors will be required to modify their cover pages when they do their annual updates in 2019. More likely, NASAA will make material changes to the proposal in response to the comments, and these requirements will not take effect for at least another year, so that it will be 2020 before most franchisors will have to implement them.