FTC to Review the Franchise Disclosure Rule

February 13, 2019by Brian Walsh

The Federal Trade Commission (FTC) regulates franchise sales across the United States. In 1978, the FTC adopted the Franchise Disclosure Rule, requiring that offers made by franchisors must provide a minimum amount of disclosure regarding the franchise offering to prospective purchasers. The Rule applies to franchises in every state, even if a particular state does not have its own disclosure requirements. Such disclosures should be provided in a Franchise Disclosure Document (FDD) and aim to prevent fraudulent franchise sales.

The FTC also requires the periodic review of the Disclosure Rule – and other business regulations – to determine whether the rule needs to be amended or even abolished. In the current political climate, many regulatory agencies are reducing the number of federal rules, so you never know what may happen under such a review. Which is about to occur again.

The review in 2007 resulted in additional amendments, including:

  • Changes to the formatting of FDDs
  • Changes in FDD filing requirements
  • Disclosures must involve information about existing franchise associations

While the FTC considered many possible changes to the procedural aspects of disclosure regulation, but in 2007, it did not consider whether the regulation was itself necessary to protect franchisees.

Now, however, we are seeing regulatory agencies knock down regulations one by one with surprising regularity. Will the FTC abolish the Franchise Disclosure Rule altogether? Will it add requirements for federal review of FDDs? Some people believe that having requirements at both the state and federal level is unnecessary and inefficient. However, the general consensus at the Franchise Law Institute (FLI) Colloquium was that federal regulation would likely be more effective than state-only review. One reason is that many franchises are located in many different states, and federal review may be more streamlined.

Attendees at the colloquium also expressed concern about the content of the disclosures, such as the importance of including more business disclosures and less emphasis on the legal franchise aspects. Some of these suggestions may be taken into consideration during the upcoming review. In addition, the North American Securities Administrator Association (NASAA) proposed changes to the FDD cover page, which would emphasize the risks of franchise investment.

Will the FTC listen to these suggestions? It remains to be seen. There are different options for what may happen to the Rule, including:

  • The FTC makes no changes
  • The FTC revamps the nature of FDDs
  • Switching from state review to federal review of FDD filings
  • Eliminating the disclosure requirement
  • Require franchisees to have professional guidance when reviewing disclosures and conducting due diligence

Franchise owners must deal with many legal issues and keep up with the constantly changing franchise and employment laws. While owning a franchise can be extremely beneficial, the legal landscape can also make it stressful with a lot at risk. Franchisors should always provide prospective purchasers will all necessary information, and franchisees should always closely review disclosures and conduct due diligence before making a purchase.

Walsh Banks Law in Orlando represents both franchisors and franchisees in all legal matters. For a free consultation give us a call at (407) 259-2426 or contact us online to Schedule a Free Confidential Consultation

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