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Application by State Regulators of the NASAA Financial Performance Representation Commentary

As we previously reported last year, on May 8, 2017, the North American Securities Administrators Association (NASAA) voted to adopt a Financial Performance Representation Commentary for franchises (FPR Commentary). The FPR Commentary supplements the 2008 Franchise Registration and Disclosure Guidelines commentary issued by NASAA in 2009 and addresses questions that have been raised over the year by franchisor representatives and state franchise examiners about financial performance representations in Item 19 of the Franchise Disclosure Document.

The effective date of the FPR Commentary was the later of 180 days after the date of adoption by NASAA or 120 days after a franchisor's next fiscal year end. This renewal season we saw more review and comment by state franchise regulators on Item 19. We assume that there was an intended focus on Item 19 this year to determine whether there was compliance with the new FPR Commentary.

We worked to review and revise financial performance representations in Item 19 of our clients' Franchise Disclosure Documents prior to filing to ensure compliance with the FRP Commentary. This included adding medians and low/high ranges when averages were used, separation of data from franchised and corporate units, and review of the use of subsets.

As is often the case with new interpretations of application of the law, we have received some comments on Item 19 from state regulators in response to our 2018 franchise registration application filings. A few examples from comments we have received to date are:

  • 19.3 of the FPR Commentary provides two admonitions - one for historical financial performance representations and one for projections - that it states that franchisors "should" use. The admonition for historical financial performance representations, which must be in bold and in a separate paragraph, is: Some outlets have sold this amount. Your individual results may differ. There is no assurance that you'll sell as much. We found that some state regulators did not find acceptable any variation in this language or any additional admonitions about variations that might be experienced by a prospective franchisee.
  • 9.23 of the FPR Commentary states that franchisors may not include any additional language that serves to disclaim the FPR being made. A careful review of past Item 19 presentations is needed to determine what should now be deleted. Look for statements beginning with "We do not represent...".
  • Some state regulators required that certain definitions be added to the FPR, such as "gross revenue," "median revenue" and "cost of goods sold," presumably to ensure that the prospective franchisee would clearly understand how the franchisor was using those terms.

The majority of franchisors do make some kind of financial performance representation in Item 19 of the Franchise Disclosure Document. Prospective franchisees are looking for such information in conducting their due diligence on the purchase of the franchise. Compliance with the guidelines in the new FPR Commentary can be accomplished with some revisions and/or additions to Item 19 presentations previously used by franchisors.

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