NASAA Requests Comments on Proposed Franchise Financial Performance Representations Commentary

15 November 2016 Publication

International Law Office Franchise Newsletter

In September 2016 the North American Securities Administrators Association Inc (NASAA) issued a notice of request seeking public comment on a proposed financial performance representations (FPR) commentary regarding franchise disclosures.(1) The Federal Trade Commission’s (FTC) Franchise Rule permits a franchisor to make a financial performance representation in Item 19 of a franchise disclosure document as long as “the franchisor [has] a reasonable basis and written substantiation for the representation at the time the representation is made”.(2) What constitutes a reasonable basis and what information is needed to substantiate an FPR is not specifically defined. According to NASAA’s notice of request, the proposed FPR commentary seeks to address various questions raised by franchisor representatives and state franchise examiners regarding FPRs. NASAA previously sought comments on the proposed FPR commentary in October 2015.

NASAA’s proposed FPR commentary includes answers to frequently asked questions about how franchisors can make and substantiate FPRs in a franchise disclosure document. Topics addressed in NASAA’s proposed FPR commentary include:

  • The presentation of data based on, or involving, company-owned outlets versus franchised outlets;
  • Disclosures of gross sales, gross profit or net profit;
  • Use of subsets (eg, based on performance, geography or other criteria);
  • Disclosures of ‘average’ and ‘median’ numbers;
  • Use of forecasts and projections; and
  • Use of disclaimers.

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