For almost half a century, disclosure, and in some cases, registration, have been the primary method of preventing fraud in connection with the sale of franchises. And generally speaking, no one has seriously suggested that there are any other acceptable alternatives for reducing the likelihood of fraud in connection with the sale of franchises. The regulators of franchising will soon be conducting a review of the Federal Trade Commission's (FTC) Franchise Disclosure Rule under a mandate from the federal government that regulatory authorities review their regulations periodically to determine whether these regulations are still needed, and whether any changes to these regulations should be made.

History of Disclosure Requirement

Disclosure was no stranger as a means to prevent fraud when, in 1978, the FTC adopted it as the preferred means of reducing fraudulent franchise sales. Starting in 1970, a dozen or so states had enacted statutes dictating how a franchisor must disclose the details of its franchises before they may be sold to the public. In addition, almost all of these states required that the offering must be reviewed by these states' administrators, and if these officials found any deficiencies in the proposed offering, the franchisor had to modify its offering materials to correct these. Since their adoption, mostly during the 1970s, a few states have eliminated the registration requirement, but for the most part, these laws have not been materially amended since their enactment.

The FTC was a latecomer to the regulation party. With the adoption of the FTC's Disclosure Rule in 1978, the FTC has laid on top of the state statutes a requirement that a minimal level of disclosure with respect to franchise sales must be made in every state, regardless of whether that state had any franchise sales legislation governing franchise sales. To the extent a state's franchise sales law afforded less protection to prospective franchisees, these statutes were pre-empted.

The Franchise Disclosure Rule was adopted approximately seven years after it was first proposed, and was amended in 2007, after a lengthy commentary period intended to give state officials, franchisors and their legal counsel an opportunity to scrutinize and comment upon proposed changes. For the most part, the 2007 changes to the FTC were procedural, not substantive. The 2007 amendments included a requirement that certain information had to be provided about a franchise system's franchise association, if one existed. However, registration was still absent from the federal regulatory process, and financial performance information (formerly known as “earnings claims”) remained optional; and the tables in Item 20, dealing with franchise success and failure within the system, were clarified.