Within Item 18, the franchisor must disclose if there are any celebrities or other public figures that have been hired to promote the franchise system.
For franchisors that are growing their brand, a celebrity endorsement directed at prospective franchisees can be a powerful way of increasing visibility and status during the franchise sales process.
Although most franchisors don’t utilize the power of celebrities to sell franchises, it’s important to keep in mind that any involvement of public figures in the franchise sales process comes with a responsibility on the part of the franchisor. Because franchisee candidates need to know about the individuals involved in the franchise system, franchisors must be transparent about any public figures involved in selling franchises. To be legally compliant with federal franchise laws, franchisors are required to disclose this information in Item 18 of the Franchise Disclosure Document (FDD).
Below, we’ll discuss the details franchisors must disclose about public figures in Item 18 of the FDD to help franchisee candidates gain a better understanding of the franchise system.
What Information Must Be Disclosed in Item 18?
According to the amended Franchise Rule, franchisors are required to disclose specific information about the involvement of, or investments made by, public figures in the franchise system. This federal requirement includes public figures that have lent their image or name to the franchisor for the purpose of selling franchises, as well as public figures that are more directly involved through franchisor management, control or investment.
For Item 18 disclosure purposes, the Federal Trade Commission (FTC) defines a public figure in 16 CFR § 436.5(r)(4) as “a person whose name or physical appearance is generally known to the public in the geographic area where the franchise will be located.”
Use of Name, Image or Endorsement of Public Figures
Under 16 CFR § 436.5(r)(1), within Item 18 franchisors must disclose any compensation or other benefit, including promises of compensation or benefits, given to a public figure as a result of the use of the public figure’s name or image in the franchisor’s name or symbol and/or the public figure’s endorsement or recommendation of the franchise to franchisee candidates for the purpose of selling franchises.
Management by Public Figures
Each Item 18 disclosure must include a description of the public figure’s duties and position in the business structure of the franchise. Franchisors must disclose the nature of each public figure’s affiliation with the franchisor and the extent to which the public figure is involved in the franchise, including management or control over the franchisor.
Investments of Public Figures
Within Item 18, franchisors must disclose each public figure’s total investment in the franchisor. This includes the amount that the public figure has contributed to the franchise in services already performed, as well as services to be performed in the future. Each disclosure must also state the type of investment made by the public figure (i.e., cash, promissory note, common stock, in-kind services, etc.).
Item 18 disclosures are limited to public figures that are involved in the selling of franchises, the management or control of the franchisor, or that have invested in the franchisor. Franchisors are not typically required to disclose the use of public figures that act only as spokespersons to promote or endorse the goods and services sold to customers by the franchise system in Item 18.
It’s important to keep in mind that the FTC’s definition of a public figure, as it relates to Item 18 disclosures, is not limited to famous celebrities. Because of that, franchisors should work with an experienced franchise attorney to determine whether any individuals involved in franchise sales qualify as public figures under federal franchise law.
To learn more about the legal aspects of public figures and franchising and how we can help develop, review or improve your Item 18 disclosures, call us at (800) 976-4904 or fill out our contact form.