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To prove timely delivery of the Franchise Disclosure Document (FDD), Item 23 requires franchisors to obtain a signed receipt for the FDD furnished to each prospective franchisee. In the context of Item 23, a franchisee’s signature can be given in handwriting, security code, unique passwords, electronic signatures, or other means by which a franchisee can authenticate his or her identity. There is very little substantive information a franchisor must disclose under Item 23, but there is a required format. Our attorneys could discuss the information a franchisor must disclose, the format it must take, and the best practices for drafting, under Item 23 of the FDD.
The disclosure requirements for Item 23 are under 16 C.F.R. § 436.5(w), and they generally entail (1) a required preamble, (2) franchise seller information, (3) the issuance (or effective) date of the FDD, (4) a list of the FDD exhibits, (5) a signature block with room for the prospective franchisee to sign and date the receipt. If not already provided in Item 1, a franchisor must also provide information on the franchisor’s registered agent under Item 23. Additionally, in conformity with current industry practices, a franchisor must include two copies of Item 23 at the end of FDD: the franchisee retains one copy as part of the FDD, and the franchisee signs the other copy and returns it to the franchisor. Franchisors must also retain copies of each signed receipt for the last three years to demonstrate compliance with the FTC Rule.
Under Item 23, the FTC Rule specifically requires that franchisors include the title “Receipt” in bold type, followed by a prescribed preamble. The beginning of a franchisor’s Item 23 should appear exactly as below:
Item 23
Receipt
This disclosure document summarizes certain provisions of the franchise agreement and other information in plain language. Read this disclosure document and all agreements carefully.
If [name of franchisor] offers you a franchise, it must provide this disclosure document to you 14 calendar days before you sign a binding agreement with, or make a payment to, the franchisor or an affiliate in connection with the proposed franchise sale.
If [name of franchisor] does not deliver this disclosure document on time or if it contains a false or misleading statement, or a material omission, a violation of federal law and state law may have occurred and should be reported to the Federal Trade Commission, Washington, D.C. 20580 and [state agency].
After the preamble, a franchisor must disclose the name, principal business address, and telephone number of each specific franchise seller offering the franchise. This includes not only the franchisor, but also a salesperson, subfranchisor, or independent franchise broker who deals with a prospective franchisee. If a franchisor is uncertain of who the particular franchise seller will be for each offer in advance, the franchisor has the option to leave a blank space in the standard FDD. In these situations a franchisor must ensure that it is filled in for each offer for sale, or a franchise may include the contact information for each franchise seller in an attachment to Item 22 and reference that attachment in Item 23. Additionally, if a franchisor does not disclose its registered agent in Item 1, it must be disclosed in Item 23, which requires providing the name and address of the franchisor’s registered agent authorized to receive service of process.
After providing the franchise seller and (if necessary) the registered agent contact information, a franchisor must next state the issuance date of the FDD. Under the FTC Rule, the issuance date is the date upon which the franchisor finalizes the current version of the disclosure document for use. However, some franchise registration states use the term “effective date,” rather than issuance date. For these states, the “effective date” is typically the date upon which the state formally approves registration of the disclosure document. If the franchisor is using a state specific FDD, the date on the receipt page should be the effective date provided by that state. If the franchisor is using one FDD for all states, the date on the receipt page should be the issuance date and the state effective dates can be provided in the state cover page at the front of the FDD. A franchisor must then state the following, and then list the titles of all exhibits attached to the FDD:
“I received a disclosure document dated [effective date or issuance date] that included the following Exhibits:”
Finally, the franchisor must provide space for the prospective franchisee’s signature and date. As stated above, the FTC Rule is flexible in the means that a franchisee provides its signature. Although not required, a franchisor may, if it elects to under Item 23, include any specific instructions for returning the receipt, such as via facsimile or email attachment.
The FTC elaborates that a “franchise seller” is a “a person that offers for sale, sells, or arranges for the sale of a franchise. It includes the franchisor and the franchisor’s employees, representatives, agents, subfranchisors, and third-party brokers who are involved in franchise sales activities.” The FAQ webpage states that the franchise sellers disclosed should be those individuals who have significant contacts with the prospective franchisee, such as those that assist the franchisee in completing the application and other forms, or those who engage in ongoing prospective franchisees throughout the sales process. Additionally, the FTC states that any person who receives a sales commission or quota credit if the deal is consummated, is a franchise seller that should be disclosed under Item 23.
Also, for franchisee signatures, the FTC’s FAQ webpage permits franchisors to use a “submit receipt” button under Item 23 that links it to an external receipt webpage where the prospective franchisee could acknowledge receipt of the FDD.
While Item 23 mostly contains language prescribed by the FTC Rule, there is still room for artful drafting. For example, a franchisor is still capable of artful drafting in the sense of making Item 23 user friendly for its sales team, and by determining the best way to ensure that the correct franchise seller is identified on each receipt page. Franchisors may also customize the signature blocks on the receipt pages for prospective franchisees. Franchisors should be sure to tailor the way a franchisee provides its signature that is the most efficient and cost-effective way for the prospective franchisee to transmit the receipt. Contacting a seasoned franchise attorney is the best practice for ensuring Item 23 of the franchise disclosure documents is both artfully drafted and compliant with the FTC Rule.