It will soon be that time of year when we will be working with our franchisor clients to prepare the required year-end updates to their Franchise Disclosure Document and file state registration renewal applications.
If you are a franchisor with a December 31 fiscal year-end, hopefully you have already contacted your auditor about starting the audit process and are preparing for the FDD update process that must be completed within the next 2 to 3 months. Of course, when your FDD update must be completed depends on the franchise registration state filing deadlines for your specific current state franchise registrations.
When we attended the American Bar Association Forum on Franchising annual franchise law seminar in October, we attended a session presented by a panel of state franchise regulators who relayed some new changes and “hot topics” for the regulators to help franchisors and their counsel submit FDDs in full compliance with state regulations and to streamline the registration process.
The following is what we learned from the state franchise regulators to keep in mind for 2018 filings:
· In drafting FDDs, extraneous information is not permitted. This is true under the FTC Rule and is something that state examiners will look for and require deletions.
· Franchisors should keep a record of what states and state examiners require them to add Risk Factors on the state cover page to be able to address any questions from examiners of other states. Franchisors should not add their own risk factors.
· Franchisors cannot disclaim the financial performance representations they make in Item 19 in other documents such as franchisee certifications, acknowledgements or franchisee disclosure questionnaires.
· State franchise regulators will be reviewing financial performance representations to make sure that they are consistent with the new NASAA commentary on financial performance representations that went into effect on November 4, 2017.
· The state examiners reminded the audience of FAQ 38 issued by the FTC that states that a change to the FDD made pursuant to a request of a state franchise examiner should be incorporated into FDDs for all states (except for state law specific changes). That means that franchisors cannot have different FDDs for use in separate states with different Item 19 FPRs or other substantive variations in the disclosures required by the FTC Rule.
· Illinois now has a standardized state addendum containing 4 points.
· Rhode Island now requires that a new tax form be filed along with franchise registration applications.
· Washington broker registration excludes employees of the franchisor but does not exclude employees of any affiliated companies. Also, individuals acting as area representatives in Washington must obtain a broker registration.
· Washington is changing the franchise registration renewal period. The franchise registration will now expire one year from the date that the franchise examiner approves the application rather than having a fixed anniversary date.
As franchisors prepare for the annual FDD update and state renewal process, they should not look at this as merely an administrative process of updating state registrations, but as a time to make sure that all FDD disclosures are accurate and complete, that all material changes since the last filing are reflected in the updated FDD, and when franchise program changes can be implemented.
Contact the attorneys at Carter & Tani for assistance in updating your franchise legal documents for the coming year.