On September 18, 2022 the North American Securities Administrators Association (“NASAA”), the association to which state franchise regulators belong, issued a Statement of Policy Regarding the Use of Franchise Questionnaires and Acknowledgments that are commonly used by franchisors in their Franchise Disclosure Documents and Franchise Agreements. The policy becomes effective on January 1, 2023. Therefore, franchisors need to give consideration to this Statement of Policy before they update their FDDs and file state franchise registration applications.
In providing background, NASAA and the state regulators consider Acknowledgements and Questionnaires as disclaimers used by franchisors to insulate themselves from potential liability by franchisees who later allege fraud or misrepresentations in the offer and sale of a franchise. Acknowledgements are typically included in the Franchise Agreement signed by the Franchisee. Some franchisors use a separate Questionnaire (we often call them the Franchisee Acknowledgement Questionnaire) that a franchisee must complete before the signing of the Franchise Agreement. NASAA sees these documents as violating anti-waiver and anti-fraud provisions of the state franchise laws. An example of a statement that per the policy franchisors cannot require a franchisee to acknowledge is:
That the Prospective franchisee has read or understands the FDD or any attachments thereto, including the franchise or other agreement.
Many franchisors use these documents for two purposes: (1) to help monitor their franchise sales process to make sure that it fully complies with applicable franchise law; and (2) to defend against a franchisee later claiming that there were violations of franchise law in the sale process should a dispute arise between the franchisor or franchisee later in the relationship.
The Statement of Policy provides:
- While franchisors can use Acknowledgements in their franchise agreements or Questionnaires that must be signed by franchisees before signing a franchise agreement, there are 11 specified provisions that cannot be included in the Acknowledgement or Questionnaire. In addition, no provisions can be included that would make a franchisee believe that they are surrendering their rights under the law or that would attempt to shift the burden of franchise law compliance from the franchisor to the franchisee. Practically speaking, once these provisions are stricken from the Acknowledgement or Questionnaire typically used, what is left may be of minimal value.
- However, if a written Acknowledgement or Questionnaire is used, a copy must be included in the Franchise Disclosure Document, and if a video or other electronic media is used to record questions and responses from a franchisee rather than a signed document, the script must be in the FDD.
- The following statement must be included in the franchisor’s franchise agreement and Franchise Disclosure Document regardless of whether an Acknowledgement or Statement is used:
No statement, questionnaire, or acknowledgment signed or agreed to by a franchisee in connection with the commencement of the franchise relationship shall have the effect of (i) waiving any claims under any applicable state franchise law, including fraud in the inducement, or (ii) disclaiming reliance on any statement made by any franchisor, franchise seller, or other person acting on behalf of the franchisor. This provision supersedes any other term of any document executed in connection with the franchise.
The NASAA Statement of Policy is not a law, but it is expected that most or all of the franchise registration states will adopt the Statement of Policy (as they have adopted other NASAA commentaries in the past) and will implement it with state registration filings in 2023. Although the policy states that it is effective as of January 1, 2023, some state regulators have stated that there is no need for a franchisor to amend their FDD and state registrations in January but should address this when filing franchise registration renewal applications.
There has been no formal adoption of the position in this Statement of Policy by the Federal Trade Commission. So, there is a question about whether these Acknowledgements and Questionnaires can be used by franchisors who only sell in non-registration states and whether franchisors who sell in both registration states and non-registration states can still use the Acknowledgements and Questionnaires in FDDs they use for non-registration states.
Of course, this new policy is an advantage to prospective franchisees who may otherwise have inadvertently waived claims of franchise law violations in completing a questionnaire or acknowledgements that the franchisor require before the granting of a franchise to a franchisee.
We would be happy to discuss with you any issues relating to this new Statement of Policy and its implementation.