New policy effective as of January 1, 2023
Franchisors routinely require prospective franchisees to answer questions about the franchise sales process and the franchisee’s understanding of the franchise agreement in writing by marking “yes” or “no” in a questionnaire. Likewise, franchise agreements often include statements similar to those in the questionnaire. These take the form of acknowledgments the franchisee agrees to when signing the franchise agreement.
Franchisors justify such questionnaires and acknowledgments as helping to avoid misunderstandings by franchisees and helping franchisors confirm that its franchise sellers were complying with the law. However, during the past few years, the North American Securities Administrators Association (NASAA) became increasingly concerned that the questionnaires and acknowledgments were being used unfairly as a tool to protect franchisors from potential liability from franchisee claims of fraud or misrepresentations in the offer and sale of a franchise, Franchisors were often successful, as some courts accepted them as a valid defense to the franchisees’ claims.
Because of its concerns, NASAA issued a new policy governing such questionnaires and acknowledgments, effective January 1, 2023. The NASAA policy lists examples of so-called “Prohibited Statements” franchisors can no longer use in “Questionnaires” and “Acknowledgements” (as defined in the NASAA policy); however, the list is not all-inclusive. A summary of the listed Prohibited Statements that cannot be used includes:
- the prospective franchisee has read and understands the FDD and attachments;
- the prospective franchisee understands or comprehends the risks associated with the purchase of the franchise;
- the prospective franchisee is qualified or suited to own and operate the franchise;
- the prospective franchise relied only on the FDD in deciding on the purchase and not any other information from others;
- neither the franchisor nor a franchise seller made any representation, including any financial performance representation, outside or different from the FDD and attachments;
- success or failure of the franchise is dependent solely or primarily on the franchisee;
- the franchisor bears no liability or responsibility for franchisee’s success or failure;
- a reiteration or duplication of any representation or statement already elsewhere in the FDD or attachments;
- the prospective franchisee has had the opportunity to or has/has not actually consulted with professional advisors or consultants or other franchisees;
- the prospective franchisee understands the franchisor is relying on questionnaires, acknowledgments, or similar documents, including to ensure that the sale was made in compliance with law and that no unauthorized, inaccurate, or misleading statements were made; and
- requires or suggests that the prospective franchisee must agree to any Questionnaires, Acknowledgments, or similar documents or provide false answers as a condition to the purchase of the franchise.
The franchisor is also required to include a specific provision in the FDD, the franchise agreement, or the applicable state law addenda stating that nothing said or signed within the commencement of the franchise relationship waives any franchisee claims under applicable law or disclaims reliance on any statements made by the franchisor, franchise seller, or anyone acting on behalf of the franchisor.
What Should a Franchisor Do Now? On its face, implementation of the NASAA policy seems easy, but in practice, it raises many questions — about how documents need to be revised, whether they need to be revised for all U.S. franchise sales, and what amendments to registration may be necessary. We expect some additional guidance from NASAA, but in the meantime, franchisors who have questions about the applicability of the NASAA policy to their franchise system or how to implement the necessary changes may contact a member of our Franchising & Distribution team.