Changes Are Likely Coming (or Here) Regarding Franchisors’ Use of Questionnaires and Acknowledgments

On December 6, 2021, the North American Securities Administrators Association, Inc. (“NASAA”) released for public comment a proposed Statement of Policy regarding the use of Franchise Questionnaires and Acknowledgments (“Statement of Policy”). The noted purpose of the proposed Statement of Policy is “to set standards for the proper use of [Q]uestionnaires and [A]cknowledgments in franchise offerings.”

“Questionnaires” refer to those documents a franchisor requires a prospective franchisee to complete and sign prior to signing a franchise agreement that contain a series of “yes” or “no” questions or other questions about what purportedly occurred, or did not occur, in the franchise sales process.

“Acknowledgments” refer to a series of acknowledgments included in a franchise agreement regarding the franchise offering.

Statement of Policy

For decades, most franchisors, including our clients, have made use of some form of Questionnaires or Acknowledgments, or both, to help ensure no violations have occurred in the franchise sales process, and no financial performance representations (“FPRs”) have been provided to the prospect outside of Item 19 of the FDD. Franchisees and their attorneys, however, have long complained that these documents allow franchisors to defeat claims of fraud and misrepresentation, and violate anti-fraud and anti-waiver provisions in state franchise laws, and recently got the attention of NASAA. As a result, NASAA prepared and issued the proposed Statement of Policy for public comment.

If adopted as written, the proposed Statement of Policy generally would result in the following:

• All Questionnaires and Acknowledgments a prospective franchisee is obligated to sign would need to be included in the FDD under Item 22 – a practice our clients generally already follow.
• Prospective franchisees would not be allowed to make any statement in any Questionnaire or Acknowledgment that is “subjective or unreasonable,” or would cause a reasonable prospective franchisee to surrender or believe they are surrendering rights under federal or state law or have the effect of shifting a franchisor’s disclosure duties to the prospective franchisee.
• Certain statements would be prohibited from being included in Questionnaires and Acknowledgments, including most notably that (1) no FPRs were made outside of or different from the FDD, (2) the prospective franchisee has read and understands the FDD and franchise agreement, and (3) the franchisor is relying on these documents in completing a franchise sale.
• A boilerplate provision would be required to be included in a franchisor’s FDD, franchise agreement, and applicable state addenda, stating that no Questionnaire or Acknowledgment or other statement shall have the affect of waiving any claims under any applicable state franchise law, or disclaiming reliance on any franchisor representations.

Public Comments

Public comments to the proposed Statement of Policy were due to NASAA by January 5, 2022.  The Larkin Hoffman franchise team submitted comments to NASAA. While we support the required addition of the boilerplate provision and other aspects of the proposed Statement of Policy, we think a number of the prohibitions go too far or are unnecessary, and will increase litigation between franchisors and franchisees, as well as encouraging fraud by franchisees who decide they want their money back—or for the franchisor to reimburse them for losses—after buying the franchise.

It is unclear to us how soon NASAA will release a final version of the Statement of Policy, and after that, how soon and how many of the franchise registration states will formally adopt or elect to follow it. That said, we are already seeing some state franchise examiners require franchisors to comply with all or a portion of the proposed Statement of Policy. This is definitely an issue franchisors will want to review as part of their 2022 renewals.