On May 19, 2019, NASAA, the North American Securities Administrators Association, issued new guidelines requiring changes to the structure, content, and overall format of the FDD State Cover Page and the Effective Date Page. These new guidelines and requirements become effective January 1, 2020, for all FDDs issued in 2020 and thereafter.
Overall, the changes are significant and represent an effort by NASAA to provide prospective franchisees with better guidance in using the FDD. Under the new State Cover Page framework, NASAA has added three new sections titled:
- How to Use This Franchise Disclosure Document
- What You Need to Know About Franchising Generally
- Special Risk(s) to Consider About This Franchise
Within each of these sections, NASAA has issued and mandated specific information and content and provides guidance as to font sizes and formatting. Attached as “Form G” to the guidelines, NASAA provides sample FDD content demonstrating what the new State Cover Page and Effective Dates Page should look like. Below is a summary of the new pages and content required by NASAA. The content should be reviewed, verified, and compared to the actual guidelines.
How to Use This Franchise Disclosure Document” Following the FTC Cover Page, NASAA requires franchisors to include the following page titled “How to Use This Franchise Disclosure Document”:
How to Use This Franchise
Here are some questions you may be asking about buying a franchise and tips on how to find more information:
Q: How much can I earn?
A: Item 19 may give you information about outlet sales, costs, profits or losses. You should also try to obtain this information from others, like current and former franchisees. You can find their names and contact information in Item 20 or Exhibit [----].
Q: How much will I need to invest?
A: Items 5 and 6 list fees you will be paying to the franchisor or at the franchisor’s direction. Item 7 lists the initial investment to open. Item 8 describes the suppliers you must use.
Q: Does the franchisor have the financial ability to provide support to my business?
A: Item 21 or Exhibit [----] includes financial statements. Review these statements carefully.
Q: Is the franchise system stable, growing, or shrinking?
A: Item 20 summarizes the recent history of the number of company-owned and franchised outlets.
Q: Will my business be the only [BRAND NAME] business in my area?
A: Item 12 and the “territory” provisions in the franchise agreement describe whether the franchisor and other franchisees can compete with you.
Q: Does the franchisor have a troubled legal history?
A: Items 3 and 4 tell you whether the franchisor or its management have been involved in material litigation or bankruptcy proceedings.
Q: What’s it like to be a [BRAND NAME] franchisee?
A: Item 20 or Exhibit [----] list current and former franchisees. You can contact them to ask about their experiences.
Q: What else should I know?
A: These questions are only a few things you should look for. Review all 23 Items and all Exhibits in this disclosure document to better understand this franchise opportunity. See the table of contents.
What You Need To Know About
Continuing responsibility to pay fees. You may have to pay royalties and other fees even if you are losing money.
Business model can change. The franchise agreement may allow the franchisor to change its manuals and business model without your consent. These changes may require you to make additional investments in your franchise business or may harm your franchise business.
Supplier restrictions. You may have to buy or lease items from the franchisor or a limited group of suppliers the franchisor designates. These items may be more expensive than similar items you could buy on your own.
Operating restrictions. The franchise agreement may prohibit you from operating a similar business during the term of the franchise. There are usually other restrictions. Some examples may include controlling your location, your access to customers, what you sell, how you market, and your hours of operation.
Competition from franchisor. Even if the franchise agreement grants you a territory, the franchisor may have the right to compete with you in your territory.
Renewal. Your franchise agreement may not permit you to renew. Even if it does, you may have to sign a new agreement with different terms and conditions in order to continue to operate your franchise business.
When your franchise ends. The franchise agreement may prohibit you from operating a similar business after your franchise ends even if you still have obligations to your landlord or other creditors.
Some States Require Registration
Your state may have a franchise law, or other law, that requires franchisors to register before offering or selling franchises in the state. Registration does not mean that the state recommends the franchise or has verified the information in this document. To find out if your state has a registration requirement, or to contact your state, use the agency information in Exhibit [----].
Your state also may have laws that require special disclosures or amendments be made to your franchise agreement. If so, you should check the State Specific Addenda. See the Table of Contents for the location of the State Specific Addenda.
“Special Risks to Consider About This Franchise” Following “What You Need to Know About Franchising Generally” is the state specific risks page now titled “Special Risks to Consider About This Franchise.” This page contains traditional state risk factors and, over time, will be populated with state-specific disclaimers. A sample of the new format is below:
Special Risks to Consider
About This Franchise
Certain states require that the following risk(s) be highlighted:
- Out-of-State Dispute Resolution. The Franchise Agreement requires you to resolve disputes with the franchisor by mediation, arbitration, and/or litigation only in [----]. Out-of-state mediation, arbitration, or litigation may force you to accept a less favorable settlement for disputes. It may also cost more to mediate, arbitrate, or litigate with the franchisor in [----] than in your own state.
- [--------]. List other risk factors as required by each state.
Certain states may require other risks to be highlighted. Check the “State Specific Addenda” (if any) to see whether your state requires other risks to be highlighted.
State Effective Dates Page In addition to adding three new sections to the State Cover Page, NASAA has changed the location of the page identifying “State Effective Dates” and has slightly updated the content. State Effective Dates are now to be disclosed on a page inserted after FDD Item 22 and before FDD Item 23. Sample content follows:
State Effective Dates
The following states have franchise laws that require that the Franchise Disclosure Document be registered or filed with the states, or be exempt from registration:
California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin.
This document is effective and may be used in the following states, where the document is filed, registered or exempt from registration, as of the Effective Date stated below:
- New York
- North Dakota
- Rhode Island
- South Dakota
Other states may require registration, filing, or exemption of a franchise under other laws, such as those that regulate the offer and sale of business opportunities or seller-assisted marketing plans.
Franchisors and franchise lawyers should carefully review NASAA’s new guidelines. The guidelines provide instructive commentary as to font sizes, placements, and other requirements.