Updating Franchise Disclosure Documents06/08/2015 | By: David T. Azrin, Esq. | Summer 2015 Newsletter
Franchisors which do not update their disclosure documents in a timely manner risk being required to suspend franchise sales temporarily until the updated disclosure document is completed, or until the state agency approves the updated disclosure document.
Federal regulations require that, each year, franchisors must amend their disclosure documents within 120 days after the end of the franchisor's fiscal year (April 30 if the franchisor uses a calendar fiscal year) to include updated annual information, including updated audited annual financial statements and updated annual information on current and former franchisees.
In addition to the required annual update, federal regulations require franchisors to update their disclosure documents more frequently than each year, if a franchisor undergoes a significant change in ownership or management, or is faced with some significant material adverse financial event or change in circumstances during the course of the year. In such event, a franchisor must amend its disclosure document within a reasonable time after the end of the quarter in which it occurred. If a material change relates to a financial performance representation in Item 19, a franchisor must notify the prospective franchise of the material change as soon as the franchisor becomes aware of the information.
The thirteen states which require registration to sell franchises have differing requirements concerning the deadline for filing an amended disclosure document for approval. For example, California, Maryland, Michigan, New York, North Dakota, and Rhode Island require amendment applications reflecting a material change to be filed "promptly." Other states including Minnesota, Virginia, and Wisconsin, require the amended application to be filed within thirty days after the material event occurs. Illinois requires the amendment application to be filed within thirty days after the end of the quarter in which the material event occurred. Washington requires an amendment application to be filed as soon as reasonably possible and before any further sale occurs.
Registration states also have differing requirements concerning a franchisor's right to continue sales in the state while an amendment application is pending. For example, in some registration states, such as Illinois, Indiana, South Dakota, Virginia, and Wisconsin, an amendment is considered effective upon filing, and the franchisor is allowed to continue selling franchises while the application to amend is pending. In other registration states, the amendment is considered effective a specified time after filing, such as Hawaii (seven days after filing); Maryland (fifteen business days after filing); Rhode Island (thirty business days after filing), and Washington (fifteen business days after filing). In other registration states, such as California, Minnesota, North Dakota, and Washington, the amendment is not considered effective until it is approved, and the franchisor must suspend sales until the new disclosure document is approved. In California, a franchisor can continue selling franchises while the application is pending, but the franchisor cannot close the sale, and must provide the prospective franchisee with the approved amended disclosure document before closing the sale.
In New York, the franchisor can continue selling franchises while the application is pending, and can even close sales, but only if the franchisor holds the franchisee's money in escrow and gives the franchisee the opportunity to rescind after giving the franchisee the approved amended disclosure document. The process is cumbersome and, as a result, most franchisors elect to wait until the amended disclosure is approved. In recent years, New York has made a concerted effort to expedite the processing of pending applications, so that franchisors' applications will be approved before early June, when an annual national franchise expo takes place in New York City.
In light of these varying requirements, the decision whether and when to issue and file an amended disclosure document requires an evaluation of various factors, including the significance of the event or change, the requirements of the states in which the franchisor is registered, and the potential for liability. Depending on these factors, franchisors may be required to suspend sales in all or some states while awaiting approval of an amendment application.
About the author: David T. Azrin, Esq., a partner at Gallet Dreyer & Berkey LLP, represents a range of business clients and individuals on employment, trademark, and franchise law matters. Mr. Azrin is the sponsor of the International Franchise Association's franchise business network program in the New York City area, and has been named one of the top franchise attorneys ("Legal Eagle") in the United States by the editorial board of Franchise Times magazine. Mr. Azrin can be reached at firstname.lastname@example.org.