Instructions for Preparing Disclosure Documents
The Rule specifies how the disclosures are to be prepared, what additional information may and may not be included, and what records franchisors must maintain.
Use of “Plain English”
The amended Rule requires franchisors to disclose all specified, material information clearly, legibly, and concisely in a single document using plain English. Section 436.1(o) of amended Rule defines the term “plain English” as:
the organization of information and language usage understandable by a person unfamiliar with the franchise business. It incorporates short sentences; definite, concrete, everyday language; active voice; and tabular presentation of information, where possible. It avoids legal jargon, highly technical business terms, and multiple negatives.
The amended Rule allows franchisors to furnish disclosure documents through a wide array of media. At the same time, it requires that disclosure documents be in a format that enables each prospective franchisee to keep the document for future reference. Accordingly, when disclosure documents are furnished as an email attachment or made accessible online, for example, they must be in a format that a prospective franchisee can download onto a computer, a CD-ROM, or the like. The document also must be printable as a single document – it cannot be presented in multiple, discrete parts. For example, a franchisor may not list law suits in Item 3 and then provide a link to external documents that explain the suits in greater detail.
Disclosures Must Address Each Disclosure Item
Franchisors must address each of the 23 disclosure items set forth in the amended Rule. If a particular disclosure Item is not applicable, then a negative response is required that includes a reference to the type of information required to be disclosed by the Item. For example, if no financing is provided, the franchisor should disclose in Item 10: “We do not offer any direct or indirect financing.”
No Additional Information
The amended Rule prohibits franchisors from including in a disclosure document any information that is not required or expressly permitted, either by the amended Rule itself or by state law. For example, franchisors may not include testimonials or promotional literature in a disclosure document. Nor may they alter or add to prescribed statements set forth in the amended Rule – the prescribed statements must be presented verbatim as specified in the amended Rule.
If literal compliance with a particular disclosure requirement would result in confusing, misleading, or unclear information, additional clarifying footnotes are permitted. For example, multiple ownership changes in the course of a single fiscal year may result in misleading Item 20 franchise outlet statistics. Such changes must be noted in a footnote.
As noted throughout these Guides, franchisors are permitted to include information that state law requires or permits in a disclosure document as long as the requirement is not inconsistent with the requirements of the amended Rule. For example, franchisors may include such information as state law specifies – in the cover page, in the body of the disclosure document, or as an addendum. Franchisors do not need to worry about violating the amended Rule’s prohibition on including additional information as long as there is state authority for including the information – whether that authority is based on a statute, a regulation, a directive or opinion, or at the specific written request of a franchise examiner.
As a general rule, any disclosures made via electronic mediamust be identical to documents furnished in “hard copy” – except, of course, for the difference in the physical form in which the disclosures are made available. All required information must be in the disclosure document itself so that downloading or printing the document incorporates all required information. Accordingly, the amended Rule expressly prohibits the use of electronic features in a disclosure document, such as audio, video, animation, pop-up screens, or links to external information outside of the disclosure document. Thus, for example, a franchisor may not disclose a lawsuit, but then link that suit to an external document that summarizes the suit.
At the same time, the amended Rule does allow non-substantive navigational tools in a disclosure document to aid prospective franchisees in reviewing the document. The amended Rule specifically permits tools such as scroll bars, internal links – such as those linking the table of contents to each specific disclosure item – and search features. It also permits minor nonsubstantive links to external features that aid a prospective franchisee’s review of the document, such as a link to AdobeTM, from which prospective franchisees can download Adobe Reader.TM A franchisor may also link the cover page reference to the Consumer Guide to Buying a Franchise with the appropriate link on the FTC’s website.
The amended Rule expressly permits franchisors to prepare multi-state disclosure documents. State-specific information may be included in the text of the disclosure document or in attachments to Item 22. A franchisor that is required or allowed by one or more franchise registration states to include information in its disclosure document may, at its option, include that information in all of its disclosure documents, including those for use in non-registration states.
As discussed on page 17 above, when a franchise relationship will involve a subfranchisor – a person who acts as a franchisor, engaging in pre-sale activities and having post-sale performance obligations – the disclosure document must include the same information required of the franchisor for the subfranchisor, to the extent applicable. Although the amended Rule requires subfranchisors who prepare disclosure documents to include all required information about the franchisor, it does not assign responsibility for preparation of the disclosures to either the franchisor or subfranchisor, but leaves that determination to them.
Statement of Prerequisites To Reviewing A Disclosure Document
Before a franchisor furnishes a disclosure document to a prospective franchisee, the amended Rule requires the franchisor to:
advise the prospective franchisee of the formats in which the disclosure document is made available, any prerequisites for obtaining the disclosure document in a particular format, and any conditions necessary for reviewing the disclosure document in a particular format.
The amended Rule does not specify how a franchisor should advise prospective franchises about the prerequisites or conditions for receiving disclosure documents; it allows franchisors to comply in any reasonable manner, provided they do so before the 14-calendar-day deadline for disclosure. Of course, the franchisor always has the burden to prove that it furnished the information to a prospective franchisee by the deadline. Most franchisors will make this information available with the initial franchise application or in the first written contact after accepting a prospect’s application. This is the point at which the issue of timely disclosure typically first arises.
As noted previously, the amended Rule permits franchisors to furnish disclosure documents in whatever medium they desire, including electronic media like a CD-ROM, an email, or a website. However, franchisors must advise prospective franchisees of any conditions they must meet in order to review the disclosure document. For example, a franchisor must state whether a prospective franchisee’s computer must be capable of reading a certain type of file or whether any specific application is necessary to view the disclosure document (such as Microsoft WordTM, Adobe ReaderTM, or a particular Internet browser).
It is not a violation of the amended Rule if a franchisor does not furnish a disclosure document in the particular format requested by a prospective franchisee. Nevertheless, if a prospective franchisee refuses to accept delivery of a document – regardless of its format – then no franchise sale can be concluded.
The amended Rule imposes two recordkeeping requirements. First, franchisors must retain, and make available to the Commission upon request, a sample copy of each materially different version of their disclosure document for at least three years after the close of the fiscal year when the document was last used. Second, for each completed franchise sale, franchisors must retain for at least three years a copy of the receipt acknowledging that the franchisee received the disclosure document.
Franchisors need retain only copies of materially different versions of their disclosure document. For example, if a franchisor files substantively nearly-identical disclosure documents in one or more of the franchise registration states (e.g., California, Washington, or Hawaii) the franchisor need retain only one copy – e.g., the document registered in California. Further, the amended Rule does not specify how records are to be kept. Therefore, the franchisor may retain copies in the format that is most convenient, whether in hard copy or in an electronic version.
This article is part of a series of articles on starting a franchise in Minnesota.
CREDIT: The content of this post has been copied or adopted from the Federal Trade Commission’s Franchise Rule Compliance Guide.