In the most significant franchise regulatory development since the Federal Trade Commission revised its Franchise Rule (16 CFR Part 436) in 2007, the rules governing financial performance representations—information conveyed to prospective franchisees disclosing historic or projected company-owned or franchised unit gross sales, net profits or both—are undergoing their most sweeping transformation in nearly a quarter century.

On May 8, 2017, the North American Securities Administrators Association (NASAA) [see note 1] voted to adopt the “NASAA Franchise Commentary on Financial Performance Representations” [see note 2] (the “2017 NASAA FPR Commentary” or the Commentary) proposed by NASAA's Franchise Project Group [see note 3] following three years of study, proposals, public comments thereon and finalization. The NASAA Franchise Project Group is the quasigovernmental coordinating body of our nation's state franchise regulators, with the Federal Trade Commission serving ex officio. (Full disclosure: The author has served for over two decades as an industry advisor to the NASAA Franchise Project Group and also served as an advisor to the Franchise Project Group subcommittee which developed the 2017 NASAA FPR Commentary.)

It is anticipated that each state having a franchise registration/disclosure statute will adopt the Commentary through new regulations, by policy or as new review standards, and that the Federal Trade Commission will likewise require compliance therewith (whether through a newly promulgated “FAQ”, policy pronouncement or otherwise).

The 2017 NASAA FPR Commentary becomes effective at the later of 180 days following its adoption (May 8, 2017) or 120 days after a franchisor's next fiscal year if the franchisor already had an effective franchise disclosure document as of the date of adoption. What this means in practical terms is that all franchisors will have to adapt their financial performance representations (FPRs) by the time they renew their disclosure documents in 2018. The reader should also note that many states are already requiring adherence to the substance of the 2017 NASAA FPR Commentary even before formal adoption on the grounds that these new requirements, restrictions and prohibitions constitute a “reasonable basis” for a financial performance representation (and having a “reasonable basis” is the touchstone of the federal and state requirements for any financial performance representation [see note 4]).

In this column, we will address the centrality of financial performance representations to our nation's federal and state franchise laws; describe how the law defines “financial performance representation”; and detail the many significant new requirements, restrictions and prohibitions concerning financial performance representations mandated by the Commentary.

The Centrality of Financial Performance Representations to the Genesis of Federal and State Franchise Laws, Rules and Regulations

The need to govern and restrict financial performance representations was one of the critical progenitors of our nation's federal and state franchise laws.

A brief history lesson for those new to the field.

Modern business format franchising as we know it burst on the American economic scene in the late 1950s and the decade of the 1960s. There was not a single franchise-specific law, rule or regulation governing franchising in the United States during this period of rapid growth.

And abuse was rampant.

What happened was simple. Story after story appeared in newspapers and magazines (cable television, the Internet and social media did not yet exist) about the millions to be made in franchising, both as a franchisor and as a franchisee. Criminals (and, in New York and elsewhere, organized crime) saw a ripe opportunity and acted on it. They went from city to city handing out slick brochures and conducting meetings promoting entirely non-existent franchise opportunities and promising millions of dollars in profits to those who paid them hefty franchise fees. They would collect tens of thousands of dollars apiece from folks who thought they were buying legitimate franchises while the criminals proceeded from city to city to replicate the fraud (again, remember that back then there was no instant communication, no Internet and, indeed, folks had to wait either many minutes or many hours until they could even place a long distance telephone call).

Tens of millions of dollars were stolen by means of this fraudulent franchise activity (which, in today's money, would amount to many hundreds of millions of dollars). And legitimate franchisors were harmed as well—the words “franchise” and “fraud” became virtually synonymous such that even the most legitimate franchisor found it difficult to sell franchises.

It was in response to this plague of franchise fraud—grounded in phony financial performance representations promising millions of dollars in profits—that in the 1970s the federal and state governments adopted the franchise sales regulatory scheme we are familiar with today. The Federal Trade Commission Franchise Rule took effect in 1979. And the 15 state franchise registration/disclosure laws (beginning with California's Franchise Investment Law, which was enacted in 1971) were all enacted during this period. Those 15 states are: California; Hawaii; Illinois; Indiana; Maryland; Michigan; Minnesota; New York; North Dakota; Oregon; Rhode Island; South Dakota; Virginia; Washington; and, Wisconsin. [see note 5]

All of these federal and state laws and regulations governing franchising were centrally and particularly focused on the scourge of utterly false and baseless promises of future financial performance which, as noted above, criminal and fraudulent “franchisors” were using to siphon millions of dollars from hapless victims.

So it is that financial performance representation governance has been a primary focus of franchise statutes since the dawn of franchise regulation.

The Need for the 2017 NASAA Financial Performance Representation Commentary

The NASAA Franchise Project Group, which meets twice a year (and whose members telephonically convene on a regular basis), was hearing from individual state examiners about franchisors setting forth financial performance representations in their Franchise Disclosure Documents which, although technically permissible, were nevertheless potentially deceptive and misleading.

For example, the NASAA Franchise Project Group learned that some franchisors were furnishing financial performance representations featuring only the top 10, or top 10 percent, highest performing outlets. Others were disclosing company-owned unit net profit numbers but omitting the key fact that these company-owned units paid no royalties and had many of their expenses paid by their corporate parents. Yet other franchisors would feature company-owned unit average “gross sales only” financial performance representations without disclosing that average franchised unit gross sales numbers were substantially lower.

Again, under both the FTC Franchise Rule and state franchise laws and regulations, such financial performance representations were technically permissible—but were viewed by the regulatory community as deceptive.

Thus, the NASAA Franchise Project Group formed a subcommittee in 2014 to address the issue of financial performance representations and what new requirements, restrictions and prohibitions, if any, should be imposed upon franchisors.

NASAA released its first iteration of the proposed Commentary for public comment in October 2013; modified it after receiving extensive public input; released it for a second round of public comment in September 2016; and, after effecting minor modifications to the Commentary in response to said additional comments, submitted the revised final 2017 NASAA FPR Commentary to the full NASAA Board for approval which, as noted, took place in May, 2017.

How the FTC Franchise Rule and State Franchise Laws Define “Financial Performance Representation”

Both the FTC Franchise Rule (at §436.1(v)) and each state franchise registration/disclosure statute [see note 6] advance identical definitions of what constitutes a “financial performance representation,” as follows:

(A)ny representation, including any oral, written or visual representation, to a prospective franchisee, including a representation in the general media, that states, expressly or by implication, a level or a range of actual or potential sales, income, gross profits, or net profits. The term includes a chart, table, or mathematical calculation that shows possible results based on a combination of variables.

The 2017 NASAA FPR Commentary's New (or Modified) Requirements, Restrictions and Prohibitions

Let us address the more significant new requirements, restrictions and prohibitions imposed upon franchisors by the 2017 NASAA FPR Commentary. Understand that not every single new requirement or restriction is addressed herein (although the most important ones certainly are) and suggest that the Commentary itself be reviewed to ascertain all of its mandates.

Carryover of 2008 NASAA Commentary. Almost 10 years ago, the NASAA Franchise Project Group issued its “2008 NASAA Franchise Registration and Disclosure Guidelines” to harmonize state franchise disclosure requirements with those imposed by the 2007 revisions to the FTC Franchise Rule, which revisions created a new—and preemptive—disclosure “floor” which the states had to comply with. The following year, NASAA issued a Commentary (which NASAA characterized as the “2008 Commentary”) to provide assistance in interpreting those disclosure guidelines. That 2008 Commentary contained content specifically addressing financial performance representations which is carried forward by the 2017 NASAA FPR Commentary.

Section 19.1 of the 2017 NASAA FPR Commentary incorporates the 2008 Commentary principle that cost and expense information alone may be furnished to prospective franchisees outside of a franchisor's FDD Item 19—so long as they are not presented as a percentage of a stated level of revenue.

This has always been a challenge to franchisors. Key indicia that prospective franchisees often desire to ascertain are what percentages of revenues a company-owned or franchised unit expends on certain central budgetary items—usually costs of occupancy, labor and goods. For example, it is commonly understood in the quick service restaurant sector that an average cost of goods exceeding 30 percent of revenues will likely prove excessively burdensome on profitability. However, this inability to convey such key percentage cost metrics standing alone and without incorporation in FDD Item 19 remains in place under the 2017 NASAA FPR Commentary.

Another carryover in §19.2 of the 2017 NASAA FPR Commentary is the 2008 Commentary mandate that a franchisor may not attach a blank “pro forma” to its Franchise Disclosure Document and treat it as a financial performance representation. A franchisor may give that blank pro forma to prospective franchisees but it may not include it in its FDD.

Finally, §19.3 of the 2017 NASAA FPR Commentary incorporates the 2009 Commentary's required admonitions (one for historical financial performance representations, the other for projections), as well as the requirement that franchisors may not include additional language that serves to disclaim the financial performance representations they are making in Item 19 or state that a franchisee may not rely on them.

Definitions. The 2017 NASAA FPR Commentary at its outset sets forth a number of “Definitions” critical to properly interpreting the Commentary's various requirements, restrictions and prohibitions. The Commentary makes clear that, when preparing an FPR, franchisors need not use the terms defined in the Commentary but can use other terms—so long as they properly define the terms they use.

For the very first time, the term “company-owned outlet” is defined in the 2017 NASAA FPR Commentary as meaning not only an outlet of the type being franchised which is owned either directly or indirectly by a franchisor (or an affiliate of the franchisor or any person required to be identified in FDD Item 2) but also includes any such outlet that: (1) is operated as a joint venture owned in part by a franchisor, any of its affiliates or any person required to be identified in that franchisor's FDD Item 2, and (2) is managed by the franchisor, one of its affiliates or such person required to be identified in FDD Item 2. A distinction is thus established between franchised unit joint ventures in which the franchisor contributes only money (beyond granting a franchise to the subject enterprise), which are not to be considered “company-owned outlets,” and those in which the franchisor, in addition to granting a franchise and investing in the enterprise, also manages the franchised outlet (itself, through an affiliate or one of its officers/directors/key management employees).

On the other hand, if a franchised outlet is managed by the franchisor (or one of its affiliates or any person required to be identified in FDD Item 2) but the unit is owned exclusively by the franchisee and operated under a franchise agreement, then that unit is deemed an “operational franchise outlet” under the 2017 NASAA Commentary (provided that it has been fully operational for one full year or, in the case of seasonal franchise systems, for at least one full season).

Critically for guest lodging networks (many of whose larger properties are not franchised but rather managed by the franchisor) and for certain other franchisors, the 2017 NASAA FPR Commentary sets forth the definition of the term “managed outlet” as meaning any outlet that: (1) is owned by a person that is not a franchisee, the franchisor, an affiliate of the franchisor or a person required to be identified in the franchisor's FDD Item 2, and (2) is managed by the franchisor's individuals or entities just recited. It is important that those new to franchising comprehend the distinction between a franchised unit and a franchisor-managed unit. With respect to a “franchised” unit, and as federal and state franchise laws contemplate, a trademark license is always granted to the franchisee. But in the case of franchisor-managed units, there is no such trademark license granted. Instead, the franchisor—not acting as such but, instead, acting as manager—is granted by the unit owner the right to affix its name to the subject unit, never licensing that name/mark to the owner of the hotel (or other franchised outlet).

Important as well are the 2017 NASAA FPR Commentary's definitions of “gross profit,” “gross sales” and “net profit.” Note that the definitions of these terms set forth in the 2017 NASAA FPR Commentary may not dovetail with GAAP, FASB or AICPA definitions.

General Requirements Regarding Financial Performance Representations. Section 19.4 of the 2017 NASAA FPR Commentary mandates that a franchisor making a “gross sales” (or any analogous term, such as “gross revenues”) FPR disclose exactly what “gross sales” means—that is, disclose which items, if any, the franchisor is deducting from total revenues, whether sales tax, discounts, allowances, returns, refunds or credits.

In a similar vein, §19.5 of the 2017 NASAA FPR Commentary requires a franchisor making a net profit FPR (however characterized) to disclose which items it is deducting from gross profit to arrive at its figure, including ordinary and recurring operating expenses, interest, income taxes, depreciation and amortization. Taken literally, this requirement would appear to require a franchisor making a “net profit” FPR to always first perform a “gross profit” calculation. But the author does not believe that was the intent of the NASAA Franchise Project Group and that if a franchisor's FPR, by way of example, features only “gross sales” and “net profit”, and fully details what is being deducted from “gross sales” to arrive at “net profit,” §19.5 will be satisfied.

Moreover, §19.6 of the 2017 NASAA FPR Commentary confirms once more, and quite explicitly, that a franchisor making an FPR must clearly identify the sources of all data presented in that FPR. If a franchisor is making an FPR based on both company-owned and franchised units, the two different types of data must be clearly identified. If a franchisor is adjusting or supplementing actual cost data in an FPR, the franchisor must clearly identify which data are actual costs, which are adjusted or supplemental costs, and the method and rationale for determining the adjusted or supplemental costs. By way of example, if a franchisor is setting forth prior calendar year expenses including fuel—but the price of fuel surged significantly during the first few months of the current calendar year (during which an FDD amendment is being prepared and processed)—then the franchisor may desire to adjust its prior calendar year's cost data to subsume such increased fuel costs. It may do so, but it must clearly disclose the adjustments that it's making, its method and rationale for doing so, and how and why the adjustments were made.

Finally, in keeping with the first ever franchise regulatory definition of the term “managed outlet” (see above), an especially consequential development for guest lodging networks (many of whose larger properties are managed and not franchised) and for certain other categories of franchisors, §19.7 of the 2017 NASAA FPR Commentary addresses how “managed outlets” must be disclosed. The answer varies depending on whether the financial results of managed outlets are materially different from the results of other outlets (company-owned and/or franchised) included in an FPR.

If the financial results of managed outlets do not materially differ from the results of other such outlets included in the FPR, then the franchisor has complete discretion as to how it may characterize them so long as it fully discloses the existence of such managed outlets in the FPR and how they are being characterized. The franchisor may have a unique FPR subcategory for managed outlets. Or it may characterize managed outlets as company-owned outlets (so long as it clearly discloses that it is doing so). As a final alternative, the franchisor may characterize a managed outlet as a franchised outlet if it makes clear that it doing so.

But if the financial performance of managed outlets is materially different than those of company-owned and/or franchised outlets featured in the FPR, then managed outlets may not be included in the FPR at all.

Use of Data From Company-Owned Units. Section 19.8 of the 2017 NASAA FPR Commentary expands upon previous Federal Trade Commission “FAQs” (as posted on the FTC's website) addressing when a franchisor can present in its FPR information from company-owned units either alone or in conjunction with franchised unit data.

If a franchisor has operational franchises, it cannot disclose only the gross sales of company-owned units without also setting forth analogous data from franchised units. In most cases, franchisors have ready access to gross sales information from their franchisees since royalties are generally paid on a percentage of revenue bases. Even if such franchisors do not have such data (because they impose fixed fees as opposed to percentage royalties), they generally have the right to obtain this information. The logic of the 2017 FPR commentary is simple: If there are operational franchisees, their gross sales data is of much greater consequence to a prospective franchisee then the gross sales data of company-owned outlets alone.

However, if there are no operational franchisees, disclosure of gross sales of company-owned units alone is permissible if the franchisor has a reasonable basis for making this disclosure. If it does so, then the franchisor must also identify the material financial and operational characteristics of the company-owned units that are reasonably anticipated to differ from franchised units.

On a related note, under the 2017 NASAA FPR Commentary, a franchisor may prepare an Item 19 financial performance representation disclosing historic unit gross profits or net profits utilizing company-owned unit cost data alone, whether or not there are operational franchises in existence. When doing so, the franchisor must include the following: (1) gross sales data from operational franchise units (if the franchisor has any); (2) the actual costs incurred by company-owned units; and, (3) critically, a supplemental disclosure or adjustments to the data presented to reflect all actual and reasonably anticipated material financial and operational differences between company-owned units and operational franchise units.

With respect to this last obligation, in furnishing the required supplemental disclosure or adjustments, the franchisor must include all expenses that a franchisee will have to pay that the franchisor's company-owned units do not, including royalties, marketing fund contributions and any other franchisee-only fees payable to the franchisor or third parties. In addition, any other reasonably anticipated differences must also be disclosed, whether they be increased franchisee management or labor costs, increased franchisee cost of goods or varying franchisee cost of occupancy. All of this information must be presented clearly and in the same format as the information about company-owned unit costs. It may not be presented in a mere footnote. Instead, if the company-owned unit information is set forth in a table, the required supplemental disclosures must also be in a table format, either as part of the table including company-owned unit costs or immediately following it.

Importantly, note that if a financial performance representation includes data from both company-owned units and franchise units, the franchisor may not merge this data in its Item 19. Instead, the data for each type of unit must separately be set forth to avoid potential misrepresentations. There is only one exception to this general rule: if there are so few units in the network that a prospective franchisee would be able to determine the identity of franchisees if the data from franchised units is separated from that of company-owned units, the franchisor may in that circumstance alone merge the data. This exception is limited to franchisors having fewer than ten operational franchised units.

Use of Subsets. A “subset” is a group of units (company-owned and/or franchised) that share one or more common characteristics, such as type of location, geography, duration or other attribute (such as, for example, “resort destination hotels” within guest lodging networks). Their inclusion in a franchisor's Item 19 FPR is now more specifically governed by §§19.12-19.15 of the 2017 NASAA FPR Commentary.

A franchisor is free to set forth subset financial performance information in its FDD Item 19 so long as it discloses the characteristics of its subsets and how the units included in any subset might differ from the characteristics of the unit that will be operated by a prospective franchisee.

Franchisors engaging in subset disclosure must also include information on the nature of the universe of outlets measured, the total number of outlets in the universe measured and the number of outlets in that universe that were actually measured.

All of this was previously ordained by the 2007 revision of the FTC Franchise Rule. But the 2017 NASAA FPR Commentary goes further and provides important guidance and restrictions on some aspects of the use of subsets, both generally and in specific circumstances.

Banned by the 2017 NASAA FPR Commentary is a franchisor's ability to “cherry pick”—that is, setting forth in FDD Item 19 data relating only to its best performing outlets and presenting them as a subset (a practice which many of the franchise regulators in the NASAA Franchise Project Group found all too prevalent). For example, setting forth in a franchisor's FPR only its top 10 percent performing units (whether company-owned and/or franchised). Now, the 2017 NASAA FPR Commentary mandates that if a franchisor discloses data from its best performing units, it must provide corresponding data for its worst performing units. So, to take the above example, if an Item 19 FPR includes the top 10 percent of a network's performers, there must be disclosure of the bottom 10 percent of that network's units. Disclosure of the entire network's performance alone is not enough.

However, it is critical to note that inclusion of a subset which is entirely legitimate but which also consists of a network's top performing units is not forbidden. Take, for example, a guest lodging network setting forth in its FPR Item 19 a subset consisting of destination resort hotels, which are generally the largest and highest grossing hotels in the system. Presenting data for such hotels would not be “cherry picking” in the traditional sense because the subset was selected based on a definable criterion rather than merely on the top grossing hotels in the network. And data regarding destination resort hotels is of material importance to prospective investors considering the development of such hotels. However, franchisors must beware the prohibition on “reverse engineering” to present the results of its top grossing units only—for example, setting forth the data of its top 10 percent franchisees and coming up with some arcane and otherwise irrelevant common characteristic that defines them other than their being the best performing units.

Can a subset be too small to be acceptable? Yes, says the 2017 NASAA FPR Commentary, believing that basing a financial performance representation on too small a sample size would result in information which is misleading even if accurate. So it is that if a franchisor has fewer than ten substantially similar company-owned and/or franchised units as of the conclusion of its last fiscal year, the franchisor may not make a financial performance representation using subset data at all. It may still present an FDD Item 19 FPR for all of its units, just not a subset of them.

Lastly, the 2017 NASAA FPR Commentary requires that if a franchisor bases a subset on geographic location, it must disclose how and why that subset was selected.

Averages and Medians. A new requirement imposed by §19.6 of the 2017 NASAA FPR Commentary provides that if a franchisor is disclosing an “average” of numbers in its FPR, it must also disclose the median of those numbers, since the existence of numerical “outliers” may skew an average thereby making it misleading (although the calculation itself is accurate). Moreover, it is now required that whenever a franchisor discloses the “average” of gross sales, it must also disclose the highest and lowest numbers in the range.

In a related fashion, §19.7 of the Commentary requires that whenever a franchisor discloses a “median” of a range of numbers in its FPR, it must also disclose the average of those numbers (and, again, if it is disclosing the median of gross sales, it must also disclose the highest and lowest numbers in the range).

Note that is a franchisor is making an FPR that includes an average or median but desires to exclude data from any company-owned or franchised units that closed during the time period covered by the FPR, the Commentary authorizes it to do so, so long as the franchisor discloses precisely how many company-owned and franchised outlets closed during the time period embraced by the FPR and, of that number, how many excluded units closed within the subject time frame after being open less than 12 months (the franchisor being required to include such information for every year embraced by its FPR).

Use of Forecasts and Projections. While most franchisors making financial performance representations limit them to historic results, nevertheless the FTC Franchise Rule has always permitted franchisors to use projections or forecasts instead. As always, the franchisor doing so must have a reasonable basis for the information presented and the FTC has opined that a reasonable basis will be presumed if the financial performance representation is made in accordance with AICPA standards. [see note 7]

Section 19.19 and 19.20 of the 2017 NASAA FPR Commentary go further by confining the information on which it is permissible for a franchisor to base an Item 19 FPR projection or forecast. First, the basis for the projection must be limited to historical data from units substantially similar to the type of unit being offered. The franchisor can adjust that information to reflect changes in the market but may not advance merely hypothetical disclosures. Second, the data upon which an FPR forecast or projection may be based must be confined to the historical data of the brand being offered. Other brands operated by the franchisor or its affiliates, or competitive brands operated by third parties, may not be used (and industry reports are equally impermissible) pursuant to restrictions imposed by the 2017 NASAA FPR Commentary.

Disclaimers. As noted above, the 2017 NASAA FPR Commentary carries forward the 2008 NASAA Franchise Commentary requirement that a franchisor include one of two required admonitions (one for historic FPRs and the other for FPR projections) if it is making financial performance representations.

Section 19.21 of the 2017 NASAA FPR Commentary states that a franchisor may not vary the language of these required admonitions except in exceptional circumstances. Otherwise, a franchisor must set forth word-for-word, without any variation—and without adding any additional disclaimer language—one of the two NASAA-required disclaimers. The exception? If a franchisor is making an FPR based on something other than average unit sales or earnings, it may change the language of the required admonition. For example, many guest lodging franchisors set forth in their FPRs not “gross revenues,” “gross sales,” or “net profit,” but instead industry specific computations—“RevPAR” (revenue per available room), “occupancy rate” (the percentage of a hotel's rooms which, on average, is occupied by paying guests) and “ADR” (the “average daily rate” paid by customers in the subject hotel). Accordingly, a hotel franchisor disclosing average RevPAR during the preceding year may change the required admonition to refer to “RevPAR” instead of “gross sales.”

Note that the required admonitions must be presented in a separate paragraph from the rest of the FPR and in bold type (but not in capital letters, underlined or in larger type than the rest of the FPR).

A far more difficult issue is raised both by §§19.3 and 19.23 of the 2017 NASAA FPR Commentary: a blanket prohibition on a franchisor including additional language from the required admonitions that in some fashion disclaims the financial performance representations they are making or states that a franchisee may not rely on the information presented. Practitioners must be extraordinarily careful here. Franchisors are required to set forth all material information in their franchise disclosure documents and not omit any material information whose absence would render another fact presented misleading. So it is that franchisors frequently have the need to explain precisely what data are being set forth in their FPRs and what variations, limitations and clarifications the prospective franchisee should be aware of. They do so to avoid omitting to state a material fact (which would trigger liability under applicable franchise laws).

For example, if a guest lodging network franchisor sets forth in its FPR a subset of destination resort hotel financial performance data, it clearly may (indeed, must) explain to prospective franchisees in its Item 19 that such data may not at all be applicable to the franchised hotel they are considering (such as one situated near a small suburban airport).

The reader should note that, while distinguishing between disclaimers and explanations is not always easy, a failure to properly do so may result in state franchise regulators rejecting the franchisor's application to register or renew its franchise disclosure document.

Conclusion

The requirements, restrictions, prohibitions and clarifications introduced by the 2017 NASAA FPR Commentary are truly significant, the most extensive overhaul of the rules governing financial performance representations since 1993. Franchisors and their counsel have an urgent job to perform to ensure that their 2018 franchise disclosure documents comply with NASAA's edicts so that applications to register or amend a franchise disclosure document are not rejected and to further ensure that liabilities are not inadvertently accrued.

Endnotes

[1] NASAA was founded in 1919. It consists of 67 state, provincial and territorial securities administrators in the 50 states, the District of Columbia, the U.S. Virgin islands, Puerto Rico, Canada and Mexico.

[2] The 2017 NASAA FPR Commentary can be accessed at http://www.nasaa.org/industry-resources/corporation-finance/franchise-resources, “NASAA Financial Performance Representation Commentary” (adopted May 8, 2017), Financial-Performance-Representation-Commentary.pdf, last accessed on September 12, 2017.

[3] The NASAA Franchise Project Group is a project group organized under NASAA's Corporate Finance Section standing committee.

[4] See, for example, §§436.5(s)(3) and 436.9(c) of the FTC Franchise Rule, 16 CFR Part 436.

[5] California Franchise Investment Law, California Corporations Code, Div. 5, Parts 1-6, §31000 et seq.; Hawaii Franchise Investment Law, Hawaii Rev. Stat., Title 26, Ch. 482E, §482-E1 et seq.; Illinois Franchise Disclosure Act, Illinois Compiled Statutes, Ch. 815, §705/1 et seq.; Indiana Code, Title 23, Article 2, Ch. 2.5, §1 et seq.; Maryland Franchise Registration and Disclosure Law, Ann. Code of Maryland, Business Regulation, Title 14, §14-201 et seq.; Michigan Franchise Investment Law, Michigan Compiled Laws, Ch. 445, §445.1501 et seq.; Minnesota Statutes, Ch. 80C, §80C.01 et seq.; New York General Business Law, Art. 33, §680 et seq.; North Dakota Franchise Investment Law, North Dakota Century Code Ann., Title 51, Ch. 51-19, §51-19-01 et seq.; Oregon Franchise Transactions Law, Oregon Revised Statutes, Title 50, Ch. 650, §650.005 et seq.; Rhode Island Franchise and Distributorship Investment Regulations Act, General Laws of Rhode Island, Title 19, Ch. 28.1, §19-28.1-1 et seq.; South Dakota Franchises for Brand-Name Goods and Services Law, South Dakota Codified Laws, Title 37, Ch. 37-5A, §37-5A-1 et seq.; Virginia Retail Franchising Act, Virginia Code, Title 13.1, Ch. 8, §13.1-557 et seq.; Washington Franchise Protection Act, Revised Code of Washington, Title 19, Ch. 19.100, §19.100.010 et seq.; Wisconsin Franchise Investment Law, Wisconsin Stats., Ch. 553, §553.01 et seq.

[6] The franchise regulating states adopted the definition of “financial performance representation” contained in the 2008 NASAA Franchise Registration and Disclosure Guidelines, adduced and propounded by the NASAA Franchise Project Group and adopted by each franchise-regulating state to properly align with the Federal Trade Commission's revision in 2007 of its Franchise Rule.

[7] FTC Amended Franchise Rule Compliance Guide (2008), http://business.ftc.gov/documents/franchise-rule-compliance-guide (then follow “Franchise Rule Compliance Guide” PDF hyperlink) (“FTC Compliance Guide” at 135-136).

David J. Kaufmann is senior partner of Kaufmann Gildin & Robbins and authored the New York Franchise Act while serving as Special Deputy Attorney General of New York.