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Ask the Experts
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Question: Are there any new developments in franchise sale regulation?
Answer: There is something we are watching that will change the way franchisors draft their Franchise Disclosure Documents (FDD). In October 2013, The North American Securities Administrators Association (loosely, the association of state regulator) issued a Proposed Multi-Unit Commentary to change the way that franchisors disclose certain multi-unit offerings.
NASAA summarized the 3 multi-unit franchising structures: Area Development (franchisor contracts with area developer to open multiple franchise units in a defined territory); Subfranchise (franchisor contracts with subfranchisor to sell franchises in a defined territory and act as the “franchisor” in that territory); and Area Representatives (franchisor contracts with area representative to market and service single unit franchises in a defined territory, but franchisees contract directly with franchisor and franchisees rely on area representative for support).
NASAA also discussed the disclosure obligations of a franchisor that also offers one or more of these multi-unit franchising structures. If a franchisor offers area development agreements as a franchising structure, NASAA confirms that the franchisor may offer area development agreements in the same FDD as the franchisor offers single unit franchises. If a franchisor offers subfranchises as a franchising structure, NASAA advises that the franchisor may only do so by a separate FDD from the FDD that franchisor uses to sell single unit franchises. This will require a second and separate offering document for subfranchises. With regard to a franchisor’s offer of area representative structures to offer franchises, NASAA similarly advises that the franchisor may only do so by a separate FDD from the FDD that the franchisor uses to sell single unit franchises. Again, this will require a second and separate offering document for area representative structures.
NASAA issued its first request for commentary in October 2013. The comment period ran through November 2013. NASAA took no action in 2013, but presumably is considering the comments and the issuance of an amended commentary for additional comments. If you are a franchisor offering these multi-unit franchise structures, you should keep a close eye on these NASAA developments. If you are a new franchisor considering these multi-unit franchising structures, you will want to consider how future NASAA action will affect your development.
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