Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: NASAA releases proposed commentary on financial performance representations, seeks public comment, (Oct 5, 2015)
Organizations Mentioned:North American Securities Administrators Association
By John W. Arden, J.D., LL.M.
A proposed commentary related to a franchisor’s financial performance representations under Item 19 of the Franchise Disclosure Document has been released for public comment by the North American Securities Administrators Association, Inc. Issued in a October 1 notice of requests for comments, the proposed commentary answers frequently asked questions about how franchisors can make financial performance representations (also known as “earnings claims”) under federal and state franchise disclosure guidelines. In particular, the proposed commentary attempts to clarify when a franchisor has a “reasonable basis” for making a financial performance representation.
The FTC Franchise Rule and applicable state franchise laws prohibit a franchise seller from making a finance performance representation (FPR) unless it has a “reasonable basis” for the representation at the time it is made. However, what constitutes a reasonable basis and what information is needed to substantiate a financial performance representation is fact-specific and varies from case to case, according to the proposed commentary.
“In every case, however, written factual information in the seller’s possession must reasonably support the representation, as the FPR is likely to be understood by a reasonable prospective franchisee,” the proposed commentary noted. “The FPR must be based on the sort of factual information upon which a prudent businessperson would rely in making such an investment decision. This FPR Commentary provides additional guidance for making and substantiating an FPR.”
More specifically, the proposed commentary (1) provides definitions of “company-owned outlets,” “gross sales,” “operational franchises,” “gross profits,” and “net profits”; (2) provides questions and answers about the use of data from company-owned outlets in FPRs; (3) covers the use of subsets in FPRs; (4) explains the use of averages and outliers in FPRs; (5) furnishes guidelines for the use of forecasts and projections; and (6) gives guidance on the use of disclaimers.
The comment period for the proposed commentary runs from October 1, 2015 through November 2, 2015. Comments should be directed by email or in hard copy to:
Dale Cantone
Office of the Attorney General, Division of Securities
200 St. Paul Place, 20th Floor
Baltimore, MD 21202-2020
or
NASAA Legal Department
Christopher Staley, Counsel
NASAA
750 First Street NE, Suite 1140
Washington, DC 20002
After the comment period has closed, NASAA will post comments to its website. Commenters therefore should submit only information that they wish to make public.
News: FranchisingDistribution