On September 18, 2022, the North American Securities Administrators Association (“NASAA”), an association which includes state franchise regulators, adopted a Statement of Policy Regarding the Use of Franchise Questionnaires and Acknowledgments, which sets standards for the use of questionnaires and acknowledgments in the franchise offering process (the “Policy”). In short, the Policy aims to prohibit the use of questionnaires or acknowledgments in the franchise sales process, as NASAA argues that the benefits of questionnaires and acknowledgements are outweighed by their potential as a liability shield against franchisee claims of misrepresentation or fraud.
January 1, 2023 Implementation
While the Policy becomes effective on January 1, 2023, it has no direct effect (it is not a law or regulation) until it is adopted and applied by the various state franchise regulators and legislators. However, we have already seen comments from examiners in California and Washington referencing the Policy, and expect other registration states to follow suit. The Policy was a hot topic at the ABA Forum on Franchising Annual Meeting in San Diego, and several of the regulators in attendance made it known that they are looking at enforcing this policy in the 2023 renewal season.
Questionnaires and Acknowledgements
Questionnaires and acknowledgements have been used by franchisors for decades to identify problematic franchise sales practices and to verify if a prospective franchisee has read the Franchise Disclosure Document (“FDD”) and understands the nature of the relationship they are entering into. However, NASAA President Melanie Senter Lubin noted, “The [Policy] is designed to better protect franchisees from unscrupulous franchisors that routinely use questionnaires and acknowledgments to try to limit their potential liability to franchisees.” Larkin Hoffman submitted written comments in January 2022 opposing portions of the proposed Policy, alongside other law firms, and franchise associations.
The Policy, as adopted, has three main prongs:
First, the Policy requires that any questionnaires and acknowledgements must be included in Item 22 of the FDD, and attached to the FDD. If the questionnaire or acknowledgment is made verbally and recorded, a written transcript of the questions must be included.
Second, the Policy lists 11 types of questionnaires and acknowledgements which its expressly prohibits, including:
- If the prospective franchisee has read or understands the FDD or any attachments thereto, including the franchise or other agreement.
- If the franchisor or the franchise seller has made any representation, including any financial performance representation, outside of or different from those in the FDD.
- If the prospective franchisee has had the opportunity to or has actually consulted with an attorney, accountant, or other professional advisor.
The Policy goes on to further prohibit any questionnaire or acknowledgement that would either cause a prospective franchisee to believe they have surrendered a right which they are entitle under law or shifts the franchisor’s disclosure duties to the prospective franchisee.
Third, if the franchisor still decides to use a questionnaire or acknowledgment (even one that complies with all prohibitions), the franchisor must still include a specific provision in its FDD, franchise agreement, or the applicable state-specific addenda, that the questionnaire or acknowledgement does not waive claims under applicable state law nor disclaim any statements made by the franchisor.
2023 Renewal Season
Franchisors will need to give consideration to the Policy in deciding how to update their FDD for the 2023 renewal season. The Policy leaves little wiggle room for franchisors in the registration states, however, a franchisor could potentially produce a “non-registration state” FDD which still contains such questionnaires and acknowledgments. Alternatively, the Policy states that the franchisor can ask a prospective franchisee questions about the sales process, so long as the franchisor does not require the prospective franchisee to document and sign statements that act as waivers in violation of state law.
As the 2023 renewal season draws near, please contact us if you have any questions about the use of franchise questionnaires and acknowledgments and to update these as required by the registration states.