IFA Franchise Development Seminars 2016 May 5, 2016 Sales Compliance Update Bud Culp General Counsel The Melting Pot Restaurants, Inc. 7886 Woodland Center Tampa, FL 33614 David A. Beyer, Partner Quarles & Brady LLP 101 E. Kennedy Blvd, Suite 3400 Tampa, FL 33602-5195
I. Disclosure Requirements: Federal and State
Laws Governing Franchises The FTC Rule Pre-sale disclosure No registration requirement Applies in all 50 states and U.S. territories State Laws Registration and disclosure laws Relationship laws Business opportunity laws
Franchise Registration States California Hawaii Illinois Indiana Maryland Michigan Minnesota New York North Dakota Rhode Island South Dakota Virginia Washington Wisconsin
Who Receives a Disclosure Document? Prospective franchisee: Any person (including agents, employees and representatives) who approaches or is approached by a franchise seller to discuss the possible establishment of a franchise relationship
Who Must Make Disclosure? Franchise Seller Anyone that offers for sale, sells, or arranges for the sale of a franchise This includes the franchisor, its employees, representatives, agents, sub-franchisors, and third party brokers who are involved in franchise sales activities This does not include existing franchisees selling their own units
When to Provide a Disclosure Document FTC Rule 14 calendar days before signing or $
When to Provide a Disclosure Document State laws 10 Business Days: Michigan First Personal Meeting / 10 Business Days New York and Rhode Island
Delivery of Franchise Agreements 7-Calendar Day Waiting Period If Franchisor makes unilateral and material changes to the Franchise Agreement, it must furnish execution copies to the prospect at least 7 calendar days prior to execution. Fees, interest rates, protected territory Delivery requirement is not triggered by: Changes to the standard franchise agreement made at the prospect s request and for its benefit Completing fill in the blank provisions (e.g., name and address of franchisee) 7-calendar day and 14-calendar day periods can run concurrent
Disclosure Document Procedures The day on which the FDD is delivered is not included for purposes of calculating the disclosure time period. Don t count the date when the agreements are signed. Don t count holidays or weekends for business days (state laws). Use a calendar.
FTC Considers Documents Furnished by the Required Date If the document is: Hand-delivered, faxed, e-mailed or otherwise delivered by the date; Directions for accessing the document on the Internet are provided by that date; or A paper or tangible electronic copy (CD Rom) was sent by first-class U.S. Mail at least 3 calendar days before the required date.
Disclosure Compliance: Electronic Disclosure FDD may be sent via e-mail or on CD-ROM Internet access allowed as well Must be in a form that permits prospect to store, download, print, or otherwise maintain the document for future reference
Disclosure Compliance: Electronic Disclosure Must advise prospect of: Formats in which FDD is available Prerequisites for obtaining FDD in a particular format Conditions necessary for reviewing the FDD in a particular format (Adobe Acrobat, browsers, etc.) Can communicate this form information however you wish: In person or telephone E-mail Franchise applications Marketing materials Must be able to prove you made format disclosure
Disclosure Compliance: Electronic Disclosure Sample Communication for E-Disclosure: We will be sending you the FDD as an attachment to a separate e- mail. Please note that your e-mail account must be able to accept attachments larger than MB. If you do not have a high-speed internet connection, it may take a while to download the FDD. You must have Adobe Reader to open the FDD. If you do not already have Adobe Reader installed on your computer, you can download it for free at www.adobe.com.
Receipts 2 copies of the Receipt for each FDD Must identify franchise seller Must be signed and dated by prospective franchisee May include instructions for returning Maintain for 3 years minimum (best practice is to keep for duration of franchise relationship)
E-Disclosure Receipts Must obtain signed Receipt after the FDD is e-mailed to prospect. Franchisor can include a link from Item 23 to a receipt-only web page, which must be identical to the printed Receipt. It should provide fill-in boxes for prospect to complete. No other links or materials can be accessible from the web page. Alternatively, the prospect can open the electronic FDD, print the last two pages, sign and date the Receipts, and return one copy to the Franchisor.
Franchise Registration In a registration state, a franchisor cannot offer or sell a franchise before it is registered with the state Must amend if there is material change
Jurisdictional Scope Which state laws apply to the transaction? Where does the prospect live? What territory will be covered? Where are discussions/negotiations held? Where will the franchisee s principal place of business be located?
Jurisdictional Scope Scenario: Franchisor is approached by a Maryland resident interested in operating a franchise in Virginia. The prospect and franchise seller had meetings in New York.
FTC Rule: Update annually within 120 days from franchisor s FYE States vary: 1 Year from Effective Date: Indiana North Dakota Virginia Maryland Rhode Island Washington Michigan South Dakota Wisconsin 120 Days from FYE (110 in California and 90 in Hawaii)
Updating the Disclosure Document Amendments as needed for any material change in the information Substantial likelihood of influencing a reasonable franchisee or a reasonable prospective franchisee in the making of a significant decision
Material Changes - Examples Change in the franchise fee or a significant increase in the initial investment A significant adverse change in financial condition The filing of any litigation required to be disclosed in item 3 Changes in Financial Performance Representations
II. Financial Performance Representations
Financial Performance Representation Any representation, including any oral, written or visual representation, to a prospective franchisee, including a representation in the general media, that states, expressly or by implication, a specific level or range of actual or potential sales, income, gross profits, or net profits. The term includes a chart, table, or mathematical calculation that shows possible results based on a combination of variables. F.T.C. Rule 436.1(e)
Which if any of these statements are financial performance representations? Earn a $10,000 profit Sales volume of $250,000 Earn up to $25,000 per year income Earn enough money to buy a new Porsche 100% return on investment within the first year Make big money This business is a real cash cow Opportunity of a lifetime
Financial Performance Representations Any financial performance representation must be contained in FDD. No verbal claims even if 100% true. Must have a reasonable basis and written substantiation. Must include a statement in Item 19 to advise prospective franchisees that written substantiation will be made available upon reasonable request. Bases and assumptions must be included in Item 19 disclosure.
Negative Disclosure Item 19 FPR is not mandatory, but must be in the FDD if made. If no FPR is made in FDD, no financial performance information can be provided to prospective franchisees during the sales process; AND FDD must include mandatory disclosures that explicitly state that no financial performance information is being provided.
What Financial Information is NOT an FPR? Cost and expense information is NOT restricted. BUT cost information cannot be presented as a percentage of sales, profits or another measure that would allow a prospective franchisee to calculate the potential income, sales or profits.
What Financial Information is NOT an FPR? Actual operating results of a specific outlet offered for sale The financial performance information should be given only to potential purchasers of the particular unit being offered for sale. Audited financial statements Financial information not directed toward prospective franchisees: Statements Made to Lenders and Bankers Press Releases and News Stories Public Company Disclosures (e.g., 10-Q and 10-K) Operating Information Provided to Existing Franchisees
What Financial Information is NOT an FPR? Audited financial statements Financial information not directed toward prospective franchisees: Statements Made to Lenders and Bankers Press Releases and News Stories Public Company Disclosures (e.g., 10-Q and 10-K) Operating Information Provided to Existing Franchisees But beware - existing franchisees can also be potential franchisees!
Use of Financial Performance Representations If a franchisor includes a financial performance representation in Item 19, the franchisor can use the FPR outside of the FDD, as long as the information is consistent with and does not exceed the information presented in the FDD: Franchisor s website Advertising (except MD and MN)/Media Claims Discussions with prospective franchisees Supplemental FPRs
What is a General Media Claim? FPR used in advertising is referred to as a general media claim. This includes all forms of advertising e.g., television, print, radio, billboards and Internet. FPR restrictions apply to general media claims.
General Media Claims Franchisor must disclose the following information for general media claims : The number and percentage of outlets from which supporting data was gathered for the FPR that actually attained or surpassed the represented level of financial performance; The time period when the performance levels were achieved; and A clear and conspicuous admonition that a new franchisee s results may differ from the FPR.
Financial Performance Representations: Recent Developments Median results Separation of Company Units Business Plans Disclosure Questionnaires