Regulators List Top Ten Errors in New Franchise Disclosure Documents

This posting was written by John W. Arden.

State franchise examiners have put together a list of the “top ten” common errors they have noted in franchise disclosure documents prepared by franchisors under the new FTC franchise rule and the NASAA interim guidelines, according to Dale E. Cantone, Chair of the Franchise and Business Opportunity Project group for the North American Securities Administrators Association (NASAA).

At a recent NASAA training session on the new franchise disclosure regime, state franchise examiners reported on the errors that applicants should try to avoid. Here is the list, as interpreted by Mr. Cantone, who serves as the Maryland franchise administrator:

1. Combining the FTC cover page and the state cover page. “Keep them separate.”

2. Using “legalese” or legal antiques in the disclosure document. “The new FTC Rule still requires that [Franchise Disclosure Documents] be prepared in Plain English.”

3. Going into detail about total investment required to begin operation of the franchise on the FTC cover page. “The new FTC Rule requires a simple statement of the total amounts . . . not a narrative.”

4. Ignoring requirements that specific elements or headings be in bold or capital letters.

5. Using the old Uniform Franchise Offering Circular sample answers when there are no bankruptcies to disclose in Item 4. “You could state simply ‘No bankruptcies are required to be disclosed in this franchise disclosure document.”

6. Overlooking the alternative channels of distribution when disclosing all territories in Item 12. “The new FTC Rule requires disclosures about whether a franchisor reserves the right to use other channels of distribution within the franchisee’s territory, outside the territory, and any restriction on the franchisee to solicit or accept orders outside the territory.”

7. Varying or limiting the language of the new FTC preambles in Item 19. “Franchisors not making Item 19 financial performance representations can’t add disclaimers or limiting language beyond the negative disclosure prescribed by the new FTC Rule.”

8. Not following the new FTC Rule format for charts, with the 3-year headings along the side.

9. Ignoring the two new FTC legends in Item 20. “[D]isclose whether franchisees signed any confidentiality clauses during the last three fiscal years and if so, include the required legend language. In addition, include in Item 20 the statement ‘If you buy this franchise, your contact information may be disclosed to other buyers when you leave the franchise system.’"

10. When filing in a state that still has a 10 business day or “first personal meeting” disclosure requirement, neglecting to reference state specific delivery requirements and deleting references to the FTC’s 14-day requirement. “For multistate documents, feel free to follow the sample receipt page included in NASAA’s proposed 2008 Franchise Registration and Disclosure Guidelines.”