Utilizing the services of an area representative in the selling of franchise units is about to get a lot more complicated — and expensive.
Under a new North American Securities Administrators Association (NASAA) mandate, franchisors must create two separate franchise disclosure documents (FDDs) when creating arrangements in which an area representative helps build the business through the selling of franchise units. NASAA has further mandated that the use of the title “Development Agent” be abolished from the FDDs.
The new mandate “clarifies how franchisors must disclose area developers in lists of current and former franchisees; how subfranchisors must list current and former franchisees; and the circumstances when franchisors must disclose business experience, litigation, and bankruptcy information of area representatives.”
For a complete rundown of these changes, click here (http://www.nasaa.org/30427/notice-request-public-comment-proposed-changes-franchise-multi-unit-commentary/).
These cumbersome changes will put additional financial strain on upstart entrepreneurs entering into franchising for the first time. The consequence of these new NASAA rules is an increase in filing fees that may ultimately lengthen the overall process of franchise filing. In effect, franchisors employing an area representative or area developer will need to draft two separate FDDs and pay filing fees for both in each of the franchise registration states where franchises are being sold. It’s an additional bit of regulation that many in the franchise community will have difficulty adjusting to. Franchisors who currently employ only one FDD when enlisting the services of an area representative will be grandfathered in until they have to do their annual renewal.
As a franchise attorney for close to four decades, I’ve seen shifts in regulations and laws and have had to guide my clients through arduous legal processes. This will be yet another change that we will just have to weather together.
The new NASAA mandate regarding area representatives is slated to begin in the summer, when the Federal Trade Commission will likely adopt it.