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Time is Up: Are You Compliant? FDD Cover Page Changes Effective In 2020

The Franchise Disclosure Document (FDD) can be overwhelming to prospective franchisees considering investment. It’s designed to inform and protect them from making any decision that enters them into a five, ten or even twenty-year business relationship that may or may not be in their best interest. In May of 2019, the North American Securities Administrators Association’s (NASAA) members voted in a change to the FDD cover letter, to be implemented on January 1, 2020. Any FDD distributed after that date will be legally required to adhere to the new changes.

We’ve seen legal modifications to the FDD throughout the years – changes from calling it the UFOC to the FDD, changes from Earnings Claims to Item 19 FPRs – and they have all been typically designed to protect franchisees and franchisors, as well as the integrity of the franchise model itself.  Over ten years ago, NASAA 2008 required franchisors to include a “State Cover Page” to a Franchise Disclosure Document, which included several standard risk factors and certain cautionary information about franchising. The new guidelines amend Part III, Section B of the Franchise Guidelines, taking protections one step further.  The idea is to make sure those daunted by the entirety of an FDD will at the very least acknowledge the guidelines in the beginning of the document regarding risk.

There Are Three Parts:

The first requirement is the addition of a new page, titled “How to Use this Franchise Disclosure Document.” This new page gives prospective franchisees clear directions, in layman’s terms, about how to use an FDD to find answers to common franchise questions.

The new guidelines require a second page titled “What You Need to Know About Franchising, Generally.” This page includes general information about franchising that many prospective franchisees do not acknowledge until after they have entered a franchise relationship.

The third page titled “Special Risks to Consider about This Franchise” replaces the current State Cover Page, giving it a new, more descriptive title than “Risk Factors.” The instructions to this page continue to allow states to require additional risk factors specific to a franchise offering, but now also include wordage regarding any requirement that franchisees resolve disputes outside the franchisee’s home state.[1]

The last change is a page that was initially in the beginning of the FDD, now it is at the end, and that is the page that requires the listing of those registration states that the franchisor is registered in and the Effective Date for each one.

The FDD is the sole, protective legal document that protects both the franchisor and franchisee from future disputes. Franchise Agreements cannot exist without it.

[1] https://www.nasaa.org/wp-content/uploads/2019/05/Franchise-State-Cover-Sheets-Proposal-Public-Comment-06122018.pdf

Harold L. Kestenbaum, Esq. Partner, Spadea Lignana Attorneys at Law
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