Should You Use State-Specific Franchise Disclosure Documents?

The end of March is upon us, and I once again find myself occupied day and night (no exaggeration — just ask my wife) with updating, revising, and preparing franchise disclosure documents (FDDs) for registration.  As I go through the process with each FDD, I have been surprised by how many franchisors are using multiple, state-specific FDDs instead of using one combined document with multi-state addenda.  Specifically, I have encountered several franchisors who use one FDD for each individual registration state (e.g., one FDD for California, a different FDD for Illinois, a different FDD still for Maryland, etc.), so that any time the franchisor is dealing with a prospect from one of those registration states, the franchisor will have to provide the prospect with a state-specific FDD, depending on which state's law applies.   

From my perspective, there are a couple of problems with this approach.  First, using state-specific FDDs create another step in the disclosure process, therefore adding an additional administrative burden on the franchisor.  Instead of using one document for all prospects, the franchisor with multiple state-specific FDDs must ensure that the right FDD is used each time a disclosure is made. 

Second, the multiple FDD approach also increases the risk that a franchisor will unintentionally violate one state's registration and disclosure law even while it complies with the other state's law.  This is because, in a small handful of situations, more than one state's law will apply to the transaction.  For example, where a franchisor offers to a Maryland resident a franchise that will be located in Virginia (which is not unrealistic given their proximity and the commuter nature of the Washington, D.C. metropolitan area), both Maryland's Franchise Registration and Disclosure Law and Virginia's Retail Franchising Act apply to that transaction.  (See Md. Code. Ann., Bus. Reg. Sec. 14-203; Va. Code Sec. 13.1-559).  In that situation, the franchisor will need to be registered in both states.  If the franchisor is using a separate FDD for each registration state, then the franchisor will need to disclose both FDDs to the prospect when making an offer and before selling a franchise.  This additional step can be confusing and difficult to remember — and the fact that not every state's law applies the same way adds additional opportunities for mistakes to happen. 

For these reasons (and mostly for the second reason) I strongly prefer to use a single FDD that can be used throughout the country.  Instead of making small changes to the document itself to comply with variations in state franchise registration and disclosure laws, I include in the FDDs I draft a single multi-state addendum that includes modifications to both the disclosure document and the franchise agreement.  In this way, the FDD can be modified by addendum to address the specific requirements of each of the individual registration states.  That one, uniform document is registered with each of the individual states (instead of using a special one for each state) and the franchisor then has one document (instead of many) that can be used with any prospect in any state, so long as it is registered.  The only exception to this is when there is a good business reason for having an FDD for one registration state that the franchisor does not want to use nationwide. 

The single-disclosure document approach reduces the risk of non-compliance in the disclosure process, which can occur through confusion, misunderstanding, or through good old-fashioned human error.  For these reasons, I avoid the multiple-FDD approach wherever possible.  That being said, I would be interested in hearing from you if you have a contrary opinion.

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