We are halfway through the phase-in period for the new FTC Rule. By July 1, 2008, all franchisors will need to rewrite their disclosure documents to incorporate the changes required by the new Rule, which revamps many of the required disclosures. One beneficial change in the new Rule is the elimination of the requirements that franchise brokers be disclosed in Item 2 and that their litigation and bankruptcy histories be disclosed in Items 3 and 4.
When the FTC Rule was first promulgated in 1979, few franchisors used brokers and those brokers engaged in franchise sales tended to be individuals or small outfits with only a few brokers. With the advent of large broker networks, it has become increasingly difficult for franchisors to ensure that their disclosure document contains all brokers in a given network. As a result, this change will ease the disclosure burden on many franchisors.
The revised Rule, however, requires disclosure in the Receipt (Item 23) of the name, principal business address and telephone number of each "franchise seller." Although the language of the Rule, and the FTC's response to Frequently Asked Questions about the amended Rule, seem to suggest that all persons involved with the sale must be identified, FTC staff have informally advised that their intent is to only require identification of the person who had the most involvement. Since the identity of that person may not be known at the time disclosure is originally made, franchisors must develop a process to later add the identity of the franchise seller and provide an updated receipt with this information to the prospective franchisee.