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Disclosure Guidelines Under the New Multi-Unit Commentary - Subfranchisors Should Prepare for 2015

On September 16, 2014, the Franchise and Business Opportunity Project Group of the North American Securities Administrators Association (NASAA) issued a Multi-Unit Commentary to provide guidance in addressing certain disclosure requirements in 3 different types of multi-unit franchising structures. All of the state franchise regulators are members of NASAA so we can expect that the state franchise regulators will follow the guidelines addressed in the commentary in 2015. The effective date of this Commentary is 180 days after the date of adoption, or 120 days after the franchisor's next fiscal year end for Franchise Disclosure Documents already in existence.

Among other franchise offerings, the new Multi-Unit Commentary includes guidelines for the Franchise Disclosure Document used by a subfranchisor in offering unit franchises. The Franchise Disclosure Documents currently used by subfranchisors in offering its unit franchises may already be in compliance since the commentary largely provides clarification or confirmation on how FTC Guidelines should be interpreted when disclosing information on multi-unit arrangements, rather than imposing new requirements. However, now is the time to review with franchise counsel if changes will need to be made to the Franchise Disclosure Document (FDD) to bring it into compliance with this new commentary.

The following summarizes the guidelines under the Commentary that will apply to a subfranchisor's unit FDD:

  • A subfranchisor is not required to disclose in the FDD the financial arrangements between it and the national franchisor. The subfranchisor may disclose in Item 6 that fees paid by the unit franchisees are shared by the subfranchisor and the national franchisor.
  • Subfranchisors are required to amend their unit FDD when there is either a material change to the information regarding the subfranchisor or there is a material change to the information disclosed regarding the national franchisor.
  • Item 3 of the subfranchisor's unit FDD must include litigation information for the national franchisor and its officers and managers identified in Item 2 in addition to litigation information for the subfranchisor and its officers and managers identified in Item 2.
  • Item 4 of the subfranchisor's unit FDD must include bankruptcy information for the national franchisor and its officers and managers identified in Item 2 in addition to bankruptcy information for the subfranchisor and its officers and managers identified in Item 2.
  • Item 8 of the subfranchisor's unit FDD must disclose any rebates received by the national franchisor and its affiliates or other revenue derived by the national franchisor or its affiliates from purchases by unit franchisees, in addition to similar disclosures for the subfranchisor.
  • In Item 13, the subfranchisor must disclose the circumstances under which the subfranchisor's subfranchise rights may be terminated by the national franchisor, and the effect any such termination or expiration or non-renewal of the subfranchisor's agreement with the national franchisor will have on the unit franchisees' rights to continue to use the marks.
  • In Item 20, the subfranchisor only has to disclose information on current and former unit franchisees. Disclosure on the subfranchisors in the system is not to be included.
  • In Item 20 of the subfranchisor's unit FDD, there are to be two sets of Tables 1 - 5. The first set of tables should include information only on the unit franchises in the subfranchisor's territory. The second set of tables should include information on all unit franchises in the franchise system.
  • The subfranchisor's FDD must include two lists of current unit franchisees. The first list is to include all of the unit franchisees in the subfranchisor's territory. The second list must include unit franchisees of the franchisor and its other subfranchisors. You can choose to list all unit franchisees in the entire system or the unit franchises in your state and, if necessary to have a minimum of 100 franchisees between the two lists, other unit franchisees in contiguous areas.
  • The financial statements of both the subfranchisor and national franchisor must be included in Item 21 of the subfranchisor's unit FDD.
  • If the national franchisor and the subfranchisor have two different fiscal year ends, the subfranchisor must update within 120 days of its fiscal year end, and then must amend its FDD when the national franchisor issues a new FDD after the end of its fiscal year to incorporate any material changes in the national franchisor's updated FDD.

For more information on the above post, contact Ms. Carter at (630)668-2135 or [email protected]

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