Registration and renewal season is here for many franchisors, and state comment letters offer a glimpse of the hot-button issues in franchise disclosure. Among trending disclosure topics are disclaimers protecting franchisors, Item 19 financial performance representations, and discretionary fees and services.
Given the volumes of disclosure that franchisors must make, disclosure documents often contain disclaimers that protect franchisors. For example, Item 7, estimating a franchisee's initial investment in a franchise, might include a disclaimer that the franchisor is not guaranteeing that the estimated costs will be a franchisee's actual costs. However, state regulators have begun pushing back on such Item 7 disclaimers. State regulators have also taken issue with disclaimers in Item 11 (assistance by franchisors), which state that a franchisor who approves a site or a lease is not representing that the site or lease is suitable for conducting the franchised business.
Generally, Item 19, which sets forth a franchisor's financial performance representations ("FPR"), is under considerable scrutiny. The importance of Item 19 to franchisors and franchisees and the attention it receives from regulators has prompted the North American Securities Administrators Association to begin working on a commentary specific to Item 19. This blog frequently addresses FPRs, and my colleague Liz Sigety recently began a series of posts about issues relating to FPRs, including how FPR issues affect new franchisors.
State regulators are also pushing back on FPR disclaimers, which might state that FPRs are not probable results and that results can vary significantly. Additionally, state regulators are closely scrutinizing the changes that regulators from other states require a franchisor to make to its FPRs. If a state requires a franchisor to revise its FPRs, and that franchisor does not make the same revision in the other states in which it has filed, state regulators may review that franchisor's FPRs with heightened scrutiny.
Another trend in state comment letters is resistance to discretionary fees and services. Some state regulators are requiring franchisors to broaden their disclosures by describing the circumstances under which they will charge franchisees certain discretionary fees or provide to franchisees certain discretionary services.
Other trending issues include how transfer fees relate to costs, caps on liquidated damages, and detailed disclosures of the types and amounts of insurance coverage franchisors require franchisees to obtain.
The landscape of franchise disclosure is ever-evolving, with new disclosure issues trending to the forefront of 2015 state comment letters. Experienced counsel can help new and established franchisors alike keep pace with the changes and, most importantly, keep offering franchises.
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