Starting January 1, 2020, franchisors will need to include new state cover sheets and a modified State Effective Dates page in their Franchise Disclosure Document (FDD). Franchisors will need to comply with the new FDD requirements starting with any 2020 FDD amendments or annual renewals. The new state cover sheets summarize key provisions of the FDD and the modified State Effective Dates page includes additional information that was not previously required. On May 19, 2019, the North American Securities Administrators Association (NASAA) adopted the new requirements with the goal of directing prospective franchisees to certain critical portions of the FDD. The new state cover sheets and modified State Effective Dates page must comply with NASAA’s instructions and examples.
State Cover Sheets
The new state cover sheets comprise of 3 pages, to be located right after the FDD cover page (and before the items to the FDD):
- How to Use This Franchise Disclosure Document
- What You Need To Know About Franchising Generally
- Special Risks to Consider About This Franchise
How to Use This Franchise Disclosure Document
The first of these new pages, titled “How to Use This Franchise Disclosure Document”, includes in a table format the locations in the FDD that may answer 8 common questions that prospective franchisees may ask or seek when they are investigating the purchase of a franchise. These questions include how much money the franchisee must invest, how much the franchisee can earn in the franchise, whether the franchise system is growing or shrinking, and whether the franchisor has a troubled legal history. The franchisor must use the exact language shown in the NASAA examples, other than filling in the correct locations in the FDD that answer each of these questions.
What You Need To Know About Franchising Generally
The next page, titled “What You Need To Know About Franchising Generally“, lists a few common restrictions or obligations placed on franchisees in a franchise system, including that a franchisee will be required to pay fees (even if the franchised outlet is losing money), that a franchisor can modify its Operations Manual without the consent of the franchisee, that a franchisee will be prohibited from operating a competing business, and restrictions to only use approved suppliers.
Special Risks to Consider About This Franchise
The last new addition is the “Special Risks to Consider About This Franchise” page. This page, similar to the current State Cover Page, lists risk factors that a franchise registration state may require the franchisor to list in its FDD based on the franchisor or its offering. At a minimum, this page must list that the Franchise Agreement or other agreements will require out-of-state dispute resolution:
Out-of-State Dispute Resolution. The franchise agreement requires you to resolve disputes with the franchisor by mediation, arbitration and/or litigation only in [State]. Out-of-state mediation, arbitration, or litigation may force you to accept a less favorable settlement for disputes. It may also cost more to mediate, arbitrate, or litigate with the franchisor in [State] than in your own state.
The NASAA instructions provide detailed information on how to address and where to locate any state-specific risk factors. During the franchise registration process, a state may require a franchisor to list additional risk factors pertinent to the franchisor or its offering.
State Effective Dates
Finally, the new requirements move the State Effective Dates page from the beginning of the FDD to the end, right before the Receipts. The modified State Effective Dates page is generally the same as before, except it tweaks some of the existing language on that page and requires an additional provision be added:
Other states may require registration, filing, or exemption of a franchise under other laws, such as those that regulate the offer and sale of business opportunities or seller-assisted marketing plans.
To ensure readability, the NASAA requirements require specific font sizes and styles be used on all the new and modified pages.
Update Your FDD
Franchisors will need to include the new state cover sheets and State Effective Dates page in their FDDs starting with the earlier of their 2020 annual renewal or any amendment made to their FDDs on or after January 1, 2020. The Larkin Hoffman franchise attorneys will be updating our clients‘ FDDs for the new NASAA requirements starting next year. Franchisors will need to ensure that their FDDs follow the new NASAA requirements starting in 2020, or risk rejection by a franchise registration state or potential grounds for rescission by a franchisee for providing a deficient FDD.