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In acknowledgment to what it perceived as the cogent appulse the COVID-19 communicable has had on abounding authorization businesses, on June 17, the North American Balance Administrators Association (NASAA) Authorization and Business Opportunities Project Group—the quasigovernmental alignment of federal and accompaniment authorization regulators that coordinates authoritative action nationwide—issued advice (the FPR Guidance) advancing new requirements, restrictions and prohibitions pertaining to Authorization Acknowledgment Document Item 19 authorization arrangement celebrated banking achievement representations (FPRs) (accessible at https://www.nasaa.org/wp-content/uploads/2020/06/FPRs-in-the-time-of-COVID-19.pdf).
(Full disclosure: this columnist has for 25 years served as one of 12 alfresco admiral to the NASAA Authorization and Business Opportunity Project Group—six apery franchisor interests, six franchisee interests—but it is noteworthy that, for the aboriginal time in memory, the advisers’ ascribe and admonition were not at all approved in affiliation with the Authorization and Business Opportunity Project Group’s promulgation of the FPR Advice advised in this column.)
The FPR Advice includes factors franchisors should accede aback free accepted and approaching use of absolute banking achievement representations, while admonishing that franchisors cannot abstain obligations to alter authorization acknowledgment abstracts by including abnegation accent suggesting that franchisees should not await on disclosures that do not reflect the appulse of COVID-19.
The NASAA Authorization and Business Opportunity Project Group’s FPR Advice is not meant for franchisors alone. To the contrary, its advice is additionally directed to accompaniment authorization regulators who are reviewing franchisor banking achievement representations in the bosom of COVID-19. Unlike antecedent NASAA Authorization and Business Opportunity Project Group statements of action (which ultimately were issued through NASAA itself), this COVID-19 advice is breezy and is issued alone by the NASAA Authorization and Business Opportunity Project Group. (A academic NASAA annual or action on this amount would accept taken abounding months to accede and absolution and accompaniment authorization regulators are gluttonous advice now.) The FPR Advice addendum that franchisors should be able to acknowledge to comments from accompaniment authorization examiners allurement for an annual of how a authorization achievement representation based on abstracts aggregate in 2019 complies with authorization law requirements. (In fact, this author’s law abutting has already accustomed a cardinal of such comments.)
The NASAA Authorization and Business Opportunity Project Group’s FPR Guidance, blue-blooded “Disclosing Banking Achievement Representations in the time of COVID-19,” begins by acquainted that as a aftereffect of the COVID-19 communicable and government responses thereto, by March 2020 abounding businesses had to cease operations and others had to change how they delivered appurtenances and casework to customers. These changes accept lasted for abounding months and may abide in effect, asserts the FPR Guidance, alike afterwards states activate acceptance added businesses to resume operations. The FPR Advice states: “It is accessible that some authorization businesses may charge to change their business models permanently, and some may cease operating entirely. Although franchising has asperous added bread-and-butter upheavals and accustomed disasters in the past, the COVID-19 pandemic’s appulse on authorization systems appears to be unprecedented.”
Since all franchisors are appropriate to alter their authorization acknowledgment abstracts no afterwards than 90 or 120 canicule afterward the abutting of their best contempo budgetary year (depending on the authorization statute involved), and aback about all franchisors are now on a agenda budgetary year, the authorization amendment/renewal advance annually bliss into aerial accessory starting in aboriginal March and continues through backward May. It is at this time that accompaniment authorization regulators are inundated with FDD amendment/renewal applications for allotment or exemption. Abounding franchisors accomplishing so this year included in Item 19 of their FDDs the banking achievement representation based on arrangement after-effects from 2019 (and conceivably antecedent periods) that predate the appulse of COVID-19. In response, the FPR Advice reveals that “(s)tate authorization administrators reviewing FDDs of franchisors that accept activated for allotment accept asked for advice on whether franchisors can accomplish Absolute FPRs in 2020 because the cogent appulse of the COVID-19 communicable … and what, if anything, franchisors charge do in the approaching to ensure that the advice independent in a Absolute FPR meets the requirements of federal and accompaniment authorization law.”
The FPR Advice afresh reviews assorted obligations of accompaniment authorization laws that may appulse this analytical issue: the acknowledging obligation beneath assertive such laws to abide to alter all absolute disclosures that are included in a Authorization Acknowledgment Document (including banking achievement representations); the charge to alter an FDD to reflect any such absolute changes to the advice independent in a registered FDD; and, the claim that franchisors accede with the anti-fraud accoutrement of accompaniment authorization registration/disclosure statutes (which accomplish it unlawful, generally, for a franchisor to accomplish an apocryphal annual of absolute actuality or omit to accompaniment a absolute actuality that would accomplish a annual not misleading).
The FPR Advice afresh argues that “(u)nder some circumstances, an FPR that discloses historically authentic abstracts may accommodate an blank of a absolute fact, or an apocryphal annual of absolute fact, if absolute changes accept occurred to that FPR by the time it is provided to a -to-be franchisee.” Accordingly, the FPR Advice warns that whether a franchisor can accomplish and abide to use an celebrated FPR in 2020 (and beyond) afterwards alteration that acknowledgment to reflect the appulse of COVID-19 depends on a cardinal of factors, including:
The FPR Advice addendum that not all franchised businesses accept been abnormally impacted in a cogent way by COVID-19 and, in fact, some accept accomplished an access in revenues. Added authorization systems, addendum the Guidance, accept accomplished reductions in revenues or added costs because of COVID-19, but those changes may not be material.
Most critically, the NASAA Authorization and Business Opportunity Project Group’s FPR Advice states:
If outlets represented in an FPR accept accomplished absolute changes in banking performance, the franchisor may no best accomplish a Absolute FPR that is not adapted to reflect those changes. Therefore, authorization systems that accept been decidedly impacted by the COVID-19 communicable should accede whether they can abide to accomplish a Absolute FPR in 2020 that does not accommodate adapted acknowledgment absorption the appulse of the COVID-19 communicable on the authorization business.
The Advice addendum that, as a aftereffect of COVID-19, some authorization systems accept afflicted or will change how they bear appurtenances and casework to the accessible (restaurants may accept started or broadcast takeout and commitment services, gyms may absolute the cardinal of associates accustomed at any one time, etc.). Some of these adaptations may be acting but others may be abiding to acclimate to new customer demands and attitudes in the post- COVID world. The FPR Advice warns that already administration of a franchisor concludes that it will accomplish changes to its authorization arrangement or business archetypal that will materially appulse its 2019 celebrated FPR, the franchisor may no best accommodate an celebrated FPR that is not adapted to reflect those changes and their appulse on the FPR.
The NASAA Authorization and Business Opportunity Project Group concludes it FPR Advice by admonishing that franchisors cannot use simple disclaimers to abstain accepting to alter their FPRs to reflect absolute changes wrought by COVID-19. The Advice appropriately forbids a franchisor for alone advertence that its celebrated banking achievement representation “… is not adumbrative of what -to-be franchisees can apprehend as a aftereffect of COVID-19, that the franchisor cannot adumbrate how the authorization arrangement will be afflicted by COVID-19, or contrarily advance that -to-be franchisees should not await on the [financial performance] disclosure.” The Advice suggests that “(a)lthough some franchisors may altercate that statements like these are actually absolute and accurate, the accent can alone be beheld by a -to-be franchisee as a added admonition not to await on the advice presented.”
There are affidavit to disagree with the access followed by the NASAA Authorization and Business Opportunity Project Group FPR Guidance. Yes, COVID-19 will actually appulse abounding authorization networks’ banking achievement this year (and conceivably beyond). And authentic it is that abounding franchisors may alter their business models to accommodated customer demands and preferences adapted by COVID-19. However, as federal and accompaniment authorization regulators afresh observe, accepting celebrated banking achievement representations is a key affair of -to-be franchisees. Limiting or eliminating their use altogether would rob -to-be franchisees of a analytical appraisal apparatus all-important for them to accomplish abreast advance decisions.
Further, we agenda that there is actually annihilation ambiguous about ambience alternating authentic 2019 (and earlier) banking achievement after-effects in a 2020 Authorization Acknowledgment Document. Artlessly stated, those were the absolute results. Will they be afresh in 2020? Conceivably not. But conflating authentic celebrated banking advice (from 2019 and earlier) with what may affect in 2020 is a fundamentally erroneous conflation of accomplished and future. Beneath all federal and accompaniment authorization laws, franchisors can acknowledge either accomplished (historic) banking achievement after-effects for their networks or, beneath bound circumstances, projected results. But the FPR Advice for the actual aboriginal time melds these two actual altered types of banking achievement data.
And it leads franchisors bottomward a perilous path. They may now face challenges (both from regulators and franchisees) that their actually authentic celebrated banking achievement representations are attenuated and actionable because they weren’t adapted to abode the appulse of a actual cosmos of consecutive events— not aloof COVID-19 but continued spells of bad acclimate (for biking and bedfellow abode franchisors), bread-and-butter recessions (for all franchisors), the accident of aliment borne affliction aloft restaurant franchisors (think Mad Cow disease) and any added such variables of one affectionate or addition which consistently affect but accept never afore appropriate a franchisor to alter its celebrated banking achievement representations. The easiest example? Anticipate aback to 9/11: air biking came to a basic halt, hotels and added bedfellow abode accessories saw their control ante abate sharply, agent rental apropos additionally saw business drop. That was the aftereffect of what transpired on Sept. 11, 2001. But no one afresh anytime appropriate that the celebrated banking achievement representations accoutrement the above-mentioned year, 2000, were in any appearance not authentic and accurate. Again, there will consistently be an accident or accident that could appulse the assiduity of above-mentioned years’ banking achievement and, beneath the FPR Guidance, franchisors will now be challenged at every about-face for not referencing this or that accurate accident or accident in an alter to their celebrated FPRs.
The alone way franchisors can assure themselves from this peril generated by the FPR Advice will be to advertise a alternation of disclosures acclamation accessible variables which may affect action advanced that could appulse their celebrated FPRs—the blazon of 40 folio set of “risk factors” frequently begin in balance offerings which would ridiculously balloon the Authorization Acknowledgment Document.
Moreover, it should be recalled that all federal and accompaniment authorization laws crave that franchisors set alternating in Item 20 of their Authorization Acknowledgment Abstracts the names, addresses and acquaintance advice for all franchisees currently in their networks as able-bodied as those who accept ancient in the accomplished three years. So it is that -to-be franchisees can calmly ascertain the appulse that COVID-19 may accept had on a accountable authorization arrangement artlessly by calling the franchisees of that network. But the FPR Advice may alert abounding franchisors from eliminating FDD Item 19 banking achievement representations altogether, an acrid aftereffect accustomed that the authorization authoritative association decades ago, in an accomplishment to alert added franchisors to accomplish Item 19 disclosures abundantly liberalized the rules administering same.
Lastly, the angle that franchisors—the all-inclusive majority of whom aloof completed the months-long endeavor of alteration and afresh renewing the registrations of their 2020 Authorization Acknowledgment Documents, charge now cease all authorization sales action while they afresh alter those FDDs to abode the appulse of COVID-19 is untenable. Accepting registrations from accompaniment authorization regulators can booty abounding weeks and alike months (for example, as of June 20, Minnesota has still not gotten about to reviewing FDD alteration applications submitted in backward April). And if, as the FPR Advice suggests, there charge be updates any time there is any blazon of absolute change from what historically pertained with annual to banking performance, afresh franchisors may accost the charge to alter assorted times anniversary year, finer adverse any adeptness to intelligently accomplish and sustain a authorization network. Recalling that franchisors charge currently registered (or exempted) FDDs not aloof for new authorization sales but for authorization renewals and authorization transfers, and the clairvoyant will bound apprehend how absurd the FPR Guidance’s appropriate agreement is (especially for beyond authorization networks which accost authorization affairs on a circadian base and charge to action them promptly, rather than cat-and-mouse weeks or months for serially adapted FDD alteration registrations).
The NASAA Authorization and Business Opportunity Project Group Advice does not technically accept the force of law (only a annotation or advice accustomed by NASAA itself does beneath accompaniment authorization registration/disclosure statutes themselves either or regulations or decrees issued thereunder). Nevertheless, it is bright that all franchise-regulating states will administer the Advice aback reviewing applications for FDD amendments and/or registration/exemption renewals. Moreover, the Advice is a basic action roadmap for franchisee admonition to chase (and a citable authoritive source) with annual to assertions that franchisor FDD Item 19 celebrated banking achievement representations are amiss in not demography into annual contest and affairs occurring able-bodied afterwards the aeon of time covered by those FPRs.
Accordingly, it is basic that franchisors promptly analyze the metrics of their banking achievement in the aboriginal four, bristles or six months of 2020 to those of the aforementioned time aeon in 2019 (and earlier, if above-mentioned years’ banking achievement are appear in FDD Item 19). If the allegory reveals a absolute change, afresh actual alteration of the FDD either eliminating the celebrated FPR altogether or ambience alternating allusive 2020 fractional year numbers (to those of 2019 or earlier) is appropriate by the Guidance. Agenda that the columnist has abstruse that added calmly capacity a “supplemental banking achievement representation” acclamation a accurate accident (COVID-19) abstracted and afar from the FDD, as accustomed by the FTC Authorization Rule and a cardinal of accompaniment authorization laws, will not be accounted to amuse the FDD acknowledgment alter claim allowable by the Guidance.
David J. Kaufmann is chief accomplice of Kaufmann, Gildin & Robbins. He authored the New York Authorization Act while confined as Special Deputy Attorney General of New York, and additionally serves as an Advisor to the North American Balance Administrators Association (NASAA) Authorization Project Group (the analogous anatomy of federal and accompaniment authorization regulators).
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