By Shannon M. Scola and Christina M. Noyes, Gust Rosenfeld P.L.C.
Franchisors may soon be limited in what they may require in questionnaires and acknowledgments (questionnaires) submitted by prospective franchisees. The North American Securities Administrators Association, Inc. (NASAA) has issued a statement regarding the use of franchise questionnaires and acknowledgments (Policy), which will become effective January 1, 2023. We anticipate all states with franchise registration laws will implement the Policy in 2023, and states with franchise relationship laws could consider the Policy in any related franchise litigation.
Franchisors generally require prospective franchisees to answer a series of questions or representations about the franchise sales process to protect from potential liability. Recently, some state regulators have challenged the use of questionnaires, finding that prospective franchisees are answering questions that are subjective, unreasonable, or repetitive.
The Policy prohibits certain statements in questionnaires, including statements related to the prospective franchisees understanding of the documents, the qualifications of the prospective franchisee, representations of financial performance made outside of the FDD, and more. See Full Policy.
The franchisor must also include in its Franchise Disclosure Document (FDD) and franchise agreement or applicable state addenda the following provision:
No statement, questionnaire, or acknowledgment signed or agreed to by a franchisee in connection with the commencement of the franchise relationship shall have the 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.
The Policy prohibits any statement that is subjective or unreasonable, which will likely be determined by the regulators. Further, if the franchisor requires the prospective franchisee to sign any questionnaire, then the proposed form of questionnaire must be listed in Item 22 of the FDD and attached as an exhibit, making it a requirement.
Based on anticipated state implementation of the Policy, we recommend, at a minimum, franchisors review and revise any questionnaire in an FDD to conform to the policy before submitting it for state review in 2023. As there might be a legal risk to closing a sale in 2023 using an unrevised questionnaire, we recommend further evaluation before closing. Please reach out if you have any questions.