As expected, the North American Securities Administrators Association (NASAA) announced last week that it voted to adopt a “Statement of Policy Regarding the Use of Franchise Questionnaires and Acknowledgements” (NASAA Policy). The NASAA Policy will require any franchisor using a franchise acknowledgement or questionnaire to: (1) revise its franchise disclosure document (FDD) to include a form non-waiver paragraph and (2) scrutinize and amend its form, where necessary, to comply with the new NASAA Policy prohibitions and mandates. The NASAA Policy is effective January 1, 2023.
Many franchise systems rely on the use of franchisee questionnaires or acknowledgment statements. Franchisors believe they are a helpful tool and consider them useful for several purposes: (i) ensuring that new franchisees are onboarded in compliance with all applicable franchise sales laws, regulations, and best practices; (ii) reducing the risk of misunderstandings or claims by disgruntled franchisees in the future; and (iii) avoiding sales solicited by misrepresentations or fraud.
There is no one uniform type of questionnaire/acknowledgement form, but most require a prospective franchisee to (i) confirm he or she did not receive financial performance representations, promise of profits, revenue, or costs incurred outside the FDD or any other statements or promises inconsistent or contrary to the information in the FDD; (ii) acknowledge that he or she had the opportunity to consult with an attorney and business advisor and ask questions; and (iii) represent that he or she has not signed any binding agreement with or paid any money to the franchisor during the statutory waiting period.
The new NASAA Policy outlines a long list of prohibited statements, including requiring that a prospective franchisee:
- has read or understands the FDD or franchise agreement;
- understands or comprehends the risks associated with the purchase of the franchise;
- is qualified or suited to own and operate the franchise;
- has relied solely on the FDD and not on any other information, representations, or statements from other persons or sources;
- has had the opportunity to or has/has not actually consulted with professional advisors or consultants or other franchisees; and
- agrees or understands that the Franchisor is relying on the questionnaire/acknowledgement to ensure that the sale of the franchise was made in compliance with state and federal law or that no unauthorized, inaccurate, or misleading statements.
A full list of prohibited provisions can be found here.
The NASAA Policy also requires that any franchisor using a questionnaire or acknowledgment to provide the following in its FDD:
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 Policy is not a change in federal or state law. However, we expect, consistent with past NASAA policies, that most state franchise examiners, will implement and follow the NASAA Policy when reviewing franchise applications. Franchise systems may reevaluate the utility of these questionnaires and acknowledgements after revising to eliminate the long list of prohibited provisions.
We will likely know more after the ABA Forum on Franchising Annual Meeting in San Diego this fall as the NASAA Policy is expected to be addressed at the workshop lead by a panel of state franchise examiners. Stay tuned for more information on this issue as it becomes available.