It has now been well over a year since the Federal Trade Commission released its amended FTC Franchise Rule (“Amended Rule”) in January 2007. At this point, it is fair to assume that most franchisors have already converted their UFOCs to the new Franchise Disclosure Document format under the Amended Rule and have addressed, or are in the process of addressing, comments received from state franchise examiners. No doubt, however, there are other franchisors who are racing to meet the fast-approaching July 1 conversion deadline. After this deadline, franchisors may only use FDDs to disclose new prospects. In addition, to be safe, franchisors will in most cases want to provide their new FDD to those active prospects who previously received a UFOC (and not an FDD), and who did not sign a franchise agreement by July 1.
Based on our experience, the overall conversion process has been relatively smooth. The registration states have done an admirable job in processing a large volume of filings under trying circumstances. That being said, the Amended Rule is still new to all of us (the FTC staff, franchise examiners, franchisors and franchise attorneys alike) and, as a consequence, we are still working through certain open issues, ambiguities, and remaining questions.
To help address some of these items, the FTC staff recently released its Compliance Guide and posted several new FAQs on its website. The North American Securities Administrators Association has also moved one step closer to adopting its replacement to the UFOC Guidelines. These developments are briefly described below.
FTC Release of Compliance Guide. In what could be described as somewhat odd timing, the FTC finally released its much-anticipated Compliance Guide last month. You may obtain a copy of it at http://www.ftc.gov/bcp/franchise/franchise-rule-compliance-guide.pdf. True to its name, the Compliance Guide is intended to help franchisors comply with the Amended Rule and to give franchisors insight as to the FTC staff’s view of what the Amended Rule requires. The FTC goes out of its way, however, to make clear that the Compliance Guide does not modify the Amended Rule. While there are no major surprises, the Compliance Guide offers helpful sample disclosure items, clarification on certain open issues and ambiguities, and further guidance as to FDD preparation and the disclosure process. We plan to follow this issue of The GPMemorandum with a Special Issue summarizing in more detail what each franchisor should know about the Compliance Guide. Stay tuned.
FTC Posts New FAQs. In addition to releasing the Compliance Guide, the FTC staff also updated its "Amended Franchise Rule FAQs" by adding FAQs 18 and 19. All of the FAQs, which have proven to be quite informative, can be found at http://www.ftc.gov/bcp/franchise/amended-rule-faqs.shtml. In responding to FAQ 18, the FTC staff states that franchisors need only disclose in Item 8 those suppliers in whom an officer of the franchisor has a “material” interest. The question of what is "material," however, will have to be determined on a case-by-case basis given that the FTC staff intentionally did not establish any sort of a set threshold. On a related note, FAQ 18 also confirms that franchisors are not required to disclose in Item 8 the identity of those officers who have a “material” interest in a supplier, nor the amount of that interest.
In its response to FAQ 19, the FTC staff clarifies that the list of franchisees included as part of the FDD must include those franchisees who have signed a franchise agreement but not yet opened an outlet. Since those franchisees may not yet have an address or telephone number, the disclosure can be made by listing the name of the franchisee, the city and state where the outlet is to be located, and a business telephone number and email address. The franchisor also must note that the outlet is not yet open. The same also holds true for those franchisees whose franchise agreements were terminated before they ever opened an outlet. These franchisees must appear on the list of terminated franchisees included in the FDD. The clarifications offered by the FTC staff in FAQ 19 are counter to the practice of many franchisors who have historically focused on open outlets in preparing their lists of franchisees. As a result, these franchisors should consult with their attorneys to determine whether any necessary FDD changes need to be made immediately, or they can wait until the next amendment or renewal filings.
NASAA Publishes Revised, Proposed 2008 Guidelines. On February 26, 2008, NASAA disseminated for comment a proposal for its 2008 Franchise Registration and Disclosure Guidelines (Amended and Restated UFOC Guidelines) (the “Amended Guidelines”). The Amended Guidelines are intended as a permanent replacement to NASAA’s UFOC Guidelines, in light of the FTC’s Amended Rule. Like the former UFOC Guidelines, the Amended Guidelines serve as an instruction manual for preparation of FDDs in compliance with state franchise registration laws. The Amended Guidelines adopt nearly verbatim the language of the Amended Rule, but also require the addition of a state cover page. The state cover page must contain certain general disclosures and also serves as a place for states to impose franchisor-specific risk factors. The state cover page also includes a state effective dates page on which the applicable effective dates of the FDD in the various registration states are listed. In addition to the cover pages, the Amended Guidelines include revised, uniform registration forms for the completion of state filings.
NASAA accepted comments to the Amended Guidelines for a 30-day period, beginning on February 26. Gray Plant Mooty submitted comments to the Guidelines, including suggested revisions to certain of the form risk factors on the state cover page and comments geared toward limiting state imposition of broker disclosure requirements. Following this comment period, NASAA has made available a further revised version of the Amended Guidelines, which is thought to be in close to final form. We will know soon enough if this is the case, as NASAA is expected to release its final version of the Amended Guidelines before the end of this month.
The information contained in this post is provided to alert you to legal developments and should not be considered legal advice. It is not intended to and does not create an attorney-client relationship. Specific questions about how this information affects your particular situation should be addressed to one of the individuals listed. No representations or warranties are made with respect to this information, including, without limitation, as to its completeness, timeliness, or accuracy, and Lathrop GPM shall not be liable for any decision made in connection with the information. The choice of a lawyer is an important decision and should not be based solely on advertisements.
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