October 18, 2022 | Legal News
NASAA’s New Policy Restricts Use of Franchise Questionnaires
For decades, franchisors have used franchise compliance questionnaires and representation statements (“Questionnaires”) in connection with franchise sales. These Questionnaires are designed to help franchisors discover improprieties and create heightened transparency in their franchise sales process — particularly around statements made or information provided to prospects outside of the FDD — and are typically completed and signed when prospects sign the franchise agreement.
However, late last year, the North American Securities Administrators Association (“NASAA”) began its initiative to outlaw Questionnaires. Specifically, NASAA was concerned that Questionnaires might cause franchisees to waive their rights under applicable state laws and to disclaim any reliance they might have had based on statements made by franchise sales personnel during the franchise sales process. After publishing its initial policy statement on restricting the use of Questionnaires (the “Policy”), NASAA invited public comments. We, along with several other franchise law firms and attorneys, opposed the adoption of the Policy (you can see our comments here). After reviewing public comments, NASAA adopted the Policy on September 18, 2022, and it will become effective on January 1, 2023.
The Policy will restrict franchisors from requiring prospective franchisees to make statements that are subjective or unreasonable or that (a) would cause franchisees to surrender or believe they have surrendered rights to which they are entitled under federal or state law; (b) shift the franchisor’s disclosure duties under federal or state law to its franchisees; or (c) are otherwise specifically prohibited under the Policy.
The Policy will also restrict franchisors from including duplicate representations or statements that have already been made elsewhere in the franchise disclosure document (“FDD”) or its attachments and from requiring franchisees to provide false answers as a condition to the purchase of the franchise.
Lastly, the Policy will require franchisors to include a statement in their FDDs and franchise agreements that any representations or acknowledgments made in the FDD, franchise agreement, or ancillary documents would not be effective to waive claims under applicable state franchise laws or disclaim reliance on any statements made by the franchisor.
WHAT IT MEANS FOR FRANCHISORS
While NASAA is not a government agency and the Policy is not law, the Policy will be followed by the state franchise regulators in the states that have franchise laws. Since the Policy becomes effective before most franchisors will be doing their 2023 FDD renewals, franchisors who use Questionnaires need to make sure they’re in compliance with the Policy as of January 1, 2023, and that might require amending their FDDs and state registrations before their annual FDD renewals are due.