By Janelle M. Lewis, Attorney, Business & Legal Strategic Consultant
Looking toward 2023, this blog post is examining how the North American Securities Administrators Association, Inc., Policy Statement regarding the use of franchise questionnaires and acknowledgements and how it will impact business strategy.
Sale Agreements between Franchisors and Prospective Franchisees
The Corporation Finance Section and the Franchise and Business Opportunities Project Group of the North American Securities Administrators Association, Inc. (NASAA) has issued a policy statement regarding the use of franchise questionnaires and acknowledgements (“Policy Statement”) that franchisors include in their agreements with prospective franchisees.The purpose of the Policy Statement is to set standards for the proper use of questionnaires and acknowledgements in franchise offerings. Franchisors use questionnaires and acknowledgements to shield from potential liabilities by franchisees alleging fraud or misrepresentations in the offer and sale of a franchise.
NASAA issued the Policy Statement on the belief that Questionnaires and Acknowledgments violate state Anti-Waiver Provisions, insofar as they are used as contractual disclaimers that release or waive a franchisee’s rights under a state franchise law.
The Policy Statement:
- Includes a list of statements that franchisors cannot require prospective franchisees to make;
- Includes prohibited statements in Questionnaires, Acknowledgements, and similar documents; and
- Includes that the franchisor must include the following provision: “No statement, questionnaire, or acknowledgement signed or agreed to by franchisee in connection with the commencement of the franchise relationship shall have effect of (i) waiving any claims under any applicable state franchise law, including fraud in the inducement, or (ii) disclaiming reliance on any statement made by any franchisor, franchise seller, or other person acting on behalf of the franchisor. This provision supersedes any other term of any document executed in connection with the franchise.”
- Goes into effect on January 1st, 2023.
- Does not have the legislative or rule making power to make such statements in Questionnaires, Acknowledgement and similar documents void or illegal – this has to occur on the state level. California, however, has made amendments to its franchise laws pursuant to the Policy Statement and other states are sure to follow.
Potential Impact on Business Strategy
The Policy Statement is a pro-consumer/franchisee policy that pierces the shield of Questionnaires and Acknowledgements when they are used by franchisors to protect against claims of fraud or misrepresentations. It is intended to protect prospective franchisees from documenting and signing statements that act as waivers in violations of state law. The impact of the Policy Statement on business strategy depends on whether the state(s) in which the franchisor operates has adopted the Policy Statement via amending their state franchise laws. If a franchisor is in a state that has or will amend their franchise laws to align with the Policy Statement, their ability to engage in fact-finding or assess prospective franchisees is not impeded. The ability of the franchisor to rely on certain statements and acknowledgements made/signed by the franchisee as a means of shielding against liabilities is curtailed and will have an impact franchisor’s risk mitigation efforts.