Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: NASAA releases franchise multi-unit commentary for public comment, (Oct 16, 2013)

By John W. Arden, J.D., LL.M.

A proposed commentary related to disclosure of multi-unit franchising in franchise disclosure documents has been released for public and internal comment by the North American Securities Administrators Association, Inc. The proposal addresses specific disclosure questions raised by franchise attorneys and state franchise examiners about multi-unit franchising, according to an October 15 announcement.

The Multi-Unit Commentary is intended to provide practical guidance for disclosing multi-unit franchising arrangements that have become common in franchising but that are not specifically addressed by NASAA’s 2008 Franchise Registration and Disclosure Guidelines or the FTC Franchise Rule. It addresses specific disclosure questions brought to the attention of NASAA’s project group.

The commentary initially describes three multi-unit franchising structures—area development, subfranchising, and area representation—but expressly does not address disclosure issues relating to franchise brokers.

An area development structure involves a person who is granted the right to open and operate multiple unit franchises, generally within a designated geographic area. An “area development agreement” generally specifies the number of units to be developed and includes a development schedule. The area developer or its affiliates are usually parties to separate unit franchise agreements with the franchisor.

A subfranchise arrangement involves a person that is granted the right to grant unit franchises to third parties, generally within a delineated geographic area. The subfranchisor is generally a party to a subfranchise agreement with the franchisor, specifying the territory in which the subfranchisor may operate and a minimum opening schedule. The subfranchisor is generally a party to unit franchise agreements with third parties and is obligated to provide support services to those third parties, called subfranchisees.

An area representation arrangement involves a person who is granted the right to sell unit franchises to third parties, to recruit third parties to enter into unit franchise agreements with the franchisor, or to provide significant support services to third parties entering into franchise agreements with the franchisor. The area representative is not a party to the unit franchise agreements.

The body of the commentary is a group of questions and answers for each of these three multi-unit franchising structures, specifically dealing with items in a franchise disclosure document. There are 33 questions and answers in all—eight pertaining to area development structures, 16 pertaining to subfranchising structures, and nine pertaining to area representative structures.

The NASAA project group recommends that franchisors use the terms adopted by the commentary to facilitate the review of franchise disclosure documents by state franchise administrators.

The comment period for the proposed commentary runs for 30 days, from October 15 through November 15, 2013. Comments should be directed by email or in hard copy to:

or

News: FranchisingDistribution