United States: NASAA Releases Supplementary Commentary On Financial Performance Representations

Franchisors need to review their Franchise Disclosure Document ("FDD") to ensure compliance with new commentary ("Commentary") issued by the North American Securities Administrators Association ("NASAA") regarding Financial Performance Representations ("FPR"). Although the Commentary on FPR's was adopted on May 8, 2017, Franchisors will have until the later of November 8, 2017 or, if the franchisor already has an effective FDD, 120 days after the franchisor's next fiscal year end to comply with the Commentary.

The general rule is that franchisors cannot make FPR's in their FDD unless the franchisor has a "reasonable basis" for the representation at the time it is made. The Commentary, as supplemented, is instructive as to what constitutes a "reasonable basis" under various FPR situations. Notably, the Commentary will now require franchisors to present both "medians" and "averages," as defined in the Commentary, when using either "median" or "average" in FPRs and to disclose the highest and lowest amounts in the "median" and "averages" to avoid presenting potentially misleading information. Furthermore, the Commentary addresses how to present company and affiliate-owned outlet financial information when the franchise system at issue also has franchisee-owned outlets. In addition, the Commentary clarifies the proper use of forecasts and projections and outlines the prohibitions against including disclaimers and waivers when making FPR's, especially in relation to the "Clear and Conspicuous Admonition."

The Commentary issued by NASAA is not the actual FPR compliance instructions, but it provides useful guidance to ensure compliance with the FRP requirements in the FDD. State franchise regulators will begin using this Commentary when evaluating franchise renewals and registration, so it is advisable for franchisors to review their current FDD FPR's and have them vetted by their franchise counsel.

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