International Law

Franchise Sales Registration

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Rubert Barkoff, one of the Legal Deans of Franchising in the United States, writes:

"I would encourage the NASAA Franchise and Business Opportunities Project Group to keep close watch on this problem in the following months, and to encourage practitioners to submit to them situations where they perceive that examiners have become unnecessarily strict or have simply missed the mark, so that the Projects Group can have a better feel for the types and extent of these problems, and take corrective measures.

The state administrators I have spoken with have shown a genuine concern as to whether there is a significant problem regarding the registration process, and want to be in a position to address it, if it does in fact exist."

Barkoff is worried about the costs of getting a franchise agreement registered when faced with uneccessarily strict regulators.

But isn't this strictness useful for protecting the consumer, the prospective franchisee?

No, and with no disrespect intended to the state regulators, the process by which a franchise registration is vetted really has very little to do with protecting the investor.

Here are two of Barkoff's concerns.

• Recently on the ABA Listserv, one lawyer commented that an examiner had asked him to substitute something for the term "franchisee"--both in the FDD and in the form of franchise agreement. According to this source, the term "franchisee" was too legalistic.
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• My firm has recently received comment letters asking that the lead-ins to Items 2, 6, and 7 be deleted. For example, the examiner objected to the fact that our Item 7 opened by saying that the following chart described the initial investment that a franchisee is likely to make if it purchases the franchise. Absent this introduction, all the prospective franchisee sees is a chart labeled "Initial Investment," or something to that effect. I contend that the approach we used, and which I have seen used for almost three decades, provides a better road map to the franchisee as to what he or she is about to read, and is in no way is confusing or misleading. In fact, it is just the opposite.

Here is my concern. Nobody knows, or has any evidence one way or another whether these changes help a prospective franchisee make a better informed decision. It is mere speculation because we haven't tested what the prospective franchisees read, if anything, in the FDD. 

Let us hope that one of the first things on Cass Sunstein's agenda is for evidence based regulation.

Full post as published by Misleading Advertising Law on January 19, 2009 (boomark / email).