What is Item 23 of the Franchise Disclosure Document?
Within Item 23, the Franchisor must include two copies of the receipt page. The receipt page is the page that a franchisee must sign to confirm and prove the proper disclosure and delivery of the FDD.
During the franchise sales process, adhering to federal franchise regulations is crucial.
Under the federal Franchise Rule, franchisors are required to provide a prospective franchisee with a copy of the Franchise Disclosure Document (FDD) no later than 14 calendar days prior to signing the franchise agreement or accepting a payment related to the sale of a franchise. This mandatory two-week FDD disclosure period is intended to provide franchisees with enough time to review and evaluate the contents of the FDD before deciding to purchase the franchise.
In this article, we’ll discuss the information that must be disclosed to franchisee candidates in Item 23 to comply with federal franchise law.
What Information Must Be Disclosed in Item 23?
Within Item 23, the franchisor must include two copies of a detachable receipt page containing a prescribed statement acknowledging the franchisee’s receipt of the FDD. This receipt page legally affirms that the franchisor provided the FDD to the franchisee in compliance with federal franchise requirements.
According to 16 CFR § 436.5(w)(1), the receipt page in Item 23 must begin with the title “Receipt” in bold letters. Below the title, the following prescribed preamble should follow:
“This disclosure document summarizes certain provisions of the franchise agreement and other information in plain language. Read this disclosure document and all agreements carefully.
If [Name of Franchisor] offers you a franchise, it must provide this disclosure document to you 14 calendar-days before you sign a binding agreement with, or make a payment to, the franchisor or an affiliate in connection with the proposed franchise sale.
If [Name of Franchisor] does not deliver this disclosure document on time or if it contains a false or misleading statement, or a material omission, a violation of federal law and state law may have occurred and should be reported to the Federal Trade Commission, Washington, D.C. 20580 and [State Agency].”
Item 23 Disclosures
In addition to the mandatory preamble above, the franchisor must also disclose the name, phone number and business address of each franchise seller offering the franchise to the franchisee. This can include salespeople, brokers, sub-franchisors and more. Because every franchise is different, an experienced franchise attorney can help determine which individuals to disclose in Item 23.
In addition to the above information, the franchisor must include the FDD’s issuance date (or “effective date”).
The following mandatory prescribed statement must follow the above disclosures: “I received a disclosure document dated __________ that included the following Exhibits:” This statement must be followed by a list of the titles of all Exhibits attached to the FDD. Space must also be provided for the prospective franchisee’s signature and signing date.
Finally, instructions for returning the receipt page to the franchisor may be provided at the end of Item 23. This elective provision can include the franchisor’s email address, mailing address, or similar method of transmission. An electronic method, via a webpage, may also be provided at the discretion of the franchisor.
Franchising is a highly regulated industry at both the federal and local state levels. Because the FDD is a large and complex legal document, it’s important to work with an experienced franchise attorney when developing each of the disclosure items to ensure their compliance with federal and state franchise laws.