Franchise Rule Disclosure Compliance Obligations – Disclosure Documents

Franchise

Disclosure Compliance Obligations

The Rule specifies who must prepare the disclosures, who must furnish them to prospective franchisees, how franchisees receive the disclosures, and how long franchisees must have to review the disclosures and any revisions to the standard franchise agreement.

Who is Responsible For Preparing Disclosure Documents?

Franchisors are responsible for preparing disclosure documents. The term “franchisor” means “any person [including any individual, group, association, limited or general partnership, corporation or any other entity] who grants a franchise and participates in the franchise relationship.” Both requirements are necessary. Accordingly, franchise sellers – such as brokers – who engage only in pre-sale activities but who have no post-sale relationship obligations are not “franchisors” under the amended Rule.

Subfranchisors are also responsible for preparing disclosure documents. The term “franchisor” expressly includes subfranchisors. The term “subfranchisor” means “a person [including any individual, group, association, limited or general partnership, corporation or any other entity] who functions as a franchisor by engaging in both pre-sale activities and post-sale performance.” This term does not include a third-party broker with no post-sale performance obligations, even if called a “subfranchisor.”

Both the franchisor and any subfranchisor are responsible for each other’s compliance with the amended Rule and are jointly and severally liable for each other’s violations. The franchisor and subfranchisor bear a joint responsibility under the Rule to ensure that required disclosures are made and are accurate. Some of the required disclosures may need to be supplied by the subfranchisor only or by the franchisor only. In other instances, both the franchisor and subfranchisor must supply the information so that the required disclosure is accurate.

Generally, Items 1-4 (information about the franchise system, prior business experience, litigation, and bankruptcy) call for both the franchisor and subfranchisor to supply information. In addition, a subfranchisor must provide Item 20 information (franchisee and company-owned outlet data). The franchisor must also provide Item 20 information if its statistics differ materially from the subfranchisor’s statistics. Finally, both the franchisor and any subfranchisor must include their own financial statements in Item 21.

CREDIT: The content of this post has been taken from the Federal Trade Commission’s document, Franchise Rule Compliance Guide.