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Bundy & Fichter PLLC Jan. 6, 2022

On January 5, 2022, both Howard Bundy and Caroline Fichter submitted comments to the North American Securities Administrator’s Association (NASAA) in support of its proposed Statement of Policy Regarding the Use Franchise Questionnaires and Acknowledgments.

NASAA is an organization of states that regulate securities and other investment activities, including franchising. The franchise side of the organization consists of people whose job it is to enforce state registration, disclosure laws and state anti-fraud laws relating to franchising. Fourteen states have registration laws and twenty-six states have franchise anti-fraud laws.

As described in detail in NASAA’s request for comment, published on December 6, 2021, NASAA is concerned about the effect of waivers and disclaimers in documents franchisees are required to sign. You can read the entire request for comment here. Those waivers and disclaimers often masquerade as “questionnaires” or “acknowledgments” or some other innocent-sounding name. NASAA is concerned that the waivers and disclaimers tend to negate the value and effect of the state anti-fraud laws and the Federal Trade Commission Act.

Howard, in a detailed submission, (available here) points out that the proposed Statement of Policy changes no laws, changes no regulations, and adopts no new requirements. It is simply an indication that the states that regulate franchise sales are now determined to remove an impediment to franchisees being able to obtain a remedy in court or in arbitration if they were misled into signing a franchise agreement. Howard then addresses six primary arguments that some franchisors have made to try to stop NASAA from adopting the policy. Although we expect to further address those arguments on this website over the coming weeks and months, the essence of each is contained in Howard’s letter.

Caroline, in an effort to not duplicate Howard’s comprehensive work, focused her comment letter on several specific improper uses of disclaimers and waivers by bad-actor franchisors. Here letter is available here. She describes how even very intelligent and well-educated people have been defrauded by franchisors. She talks about how sophisticated sales people can induce even very bright people to sign statements that they later learn were not true.

As the NASAA proposal describes, and as described by Howard, the existing franchise laws that have now been on the books for about 50 years contain “anti-fraud” provisions, making the use of any misrepresentations (or omitting a material fact necessary to make statements made not misleading) illegal and a violation. In several states, a willful violation is a crime. The laws, generally, also contain provisions called “anti-waiver” clauses, making it illegal and a violation to require a franchisee to sign a document that has the effect of waiving or disclaiming any rights they might have under the statute (including to obtain a remedy if they are defrauded). In the face of those laws, it has become common for franchisors to include many paragraphs of waivers and disclaimers (almost always under other names) in their franchise paperwork that the investor must sign to get the right to operate a business using the trademark and system of the franchisor. It is NASAA’s position that every one of those waivers violates the law as it exists today.

NASAA’s proposed cure is in two parts: First, NASAA would prohibit certain specific questions or statements; Second, NASAA would require an admonition in prominent places in the documents to the effect that “nothing in this document shall be construed as a waiver or disclaimer of any right under the state franchise laws”.

The position taken by NASAA is a position the lawyers of the Bundy Law Firm have long advocated for. We believe it is good for franchisors because it will level the playing field between franchisors. Good and honest franchisors will feel less pressure to engage in fraudulent and misleading practices in order to compete with the bad-actors. It will be good for franchising as a method of doing business because there will be less franchisees who fail and, because of that more people will want to buy franchises. Finally, it will be good for franchisees because they will have a greater assurance of truthful and accurate information from franchisors and that they will have a remedy if it turns out they were a victim of fraud.

In summary, honesty in franchise sales is the law. It has a been the law for half a century. Bad-actor franchisors should not be able a brazenly defraud people without facing any consequences. Every person offering or selling franchises needs to learn, and learn quickly, that they must be personally responsible for the truth, accuracy and completeness of what they tell prospective investors. If not, NASAA has sent a clear signal that, going forward, they face potential serious consequences.

Please contact Bundy Law Firm if you have any questions about this important policy development or if you have specific experiences you would like to discuss or have us share with the government officials involved.