The COVID-19 pandemic has dramatically impacted business in 2020, from government stay at home orders that prevented operations to adjusted customer service capacity or additional safety procedures. Some of these changes to your franchise system may be what the FTC or states regard as “material”, meaning the change likely affects a prospective franchisee’s conduct or decisions with respect to the purchase of the franchise. If a change is material, then the franchisor has an obligation to amend its FDD to account for the changes.
Federal and state law provide standard guidance about what is a material change, and in June 2020 the North American Securities Administration Association (NASAA) issued additional guidance specific to the pandemic. The major takeaways from these guidelines were that more than temporary changes to the way that the franchise system delivers goods and services or operates need to be included in an amendment.
Even more significantly, the NASAA guidelines impacted what franchisors can disclose for a financial performance representation (“FPR”) in its 2020 FDD. The guidelines emphasized that merely having historically accurate information from pre-pandemic operations is not enough to prevent the FPR from being misleading. For example, a 2019 gross sales disclosure for a dine-in restaurant may not be reasonable given the year-to-date 2020 gross sales that are significantly behind 2019 sales. Each franchisor must carefully review the NASAA guidelines to determine if its FPRs are still supported by a “reasonable basis.” If not, then Item 19 needs to be updated to reflect pandemic operations or needs to be removed.
In this webinar, Manning Fulton attorneys Ashley Nielsen and Carlie Smith discuss the implications of the NASAA guidelines in more detail and explain how to move forward if you’ve determined that a pandemic-induced change to your franchise system is material.