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Financial Performance Representations 2017

FINANCIAL PERFORMANCE REPRESENTATIONS

NASAA COMMENTARY EXPECTED TO GO INTO EFFECT IN 2017; FRANCHISORS SHOULD BE PREPARED IN 2017

In early November of 2016, the three attorneys of Carter & Tani attended the annual American Bar Association Forum on Franchising franchise law seminar ("ABA Forum") that was held this year in Miami. We each attended numerous sessions over the 3-day seminar, some plenary sessions for the entire audience, and some smaller group Workshops. Each session presented issues affecting franchising and related areas of law, and offered "best practices" tips.

At the ABA Forum we were advised that the North American Securities Administrators Association (NASAA) has issued a revised Commentary on Financial Performance Representations ("FPRs"). The FPR Commentary was first issued by NASAA in October of 2015 and was revised following public comment. The Commentary, when it becomes effective, will require compliance with new requirements affecting the presentation of FPRs in Item 19 of Franchisors' Franchise Disclosure Documents ("FDDs"). The expectation is that NASAA will approve the Commentary in its current form in May of 2017. It will go into effect 180 days following date it is approved by NASAA.

Even though the Commentary will not be in effect for most Franchisors who update their FDDs in 2017, we were informed that some state franchise examiners will be following the Commentary during the 2017 renewal period. So franchisors should be prepared to comply with the Commentary, even though it technically will not be in effect for another year.

Here are a few highlights of the Commentary's requirements:

- If a franchisor presents an average of sales or revenue, it must also disclose the median and the high-low range.

- The Commentary will address when and how franchisors can use company-owned performance data.

- A franchisor may not merge franchised and company-owned data (unless there are 10 or few units and there are no material differences between franchised and company-owned performance)

- While the use of subsets (selected non-representative units) is permitted if there is a reasonable basis, it is not permissible to present a subset of the highest performers unless a subset of lowest performers is also presented.

- Use of disclaimers that disclaim the FPRs presented in Item 19 are prohibited.

Carter & Tani will assist our clients in complying with the NASAA Commentary, and will advise them regarding implementation of these changes in 2017 or waiting until the Commentary is effective.

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