What are a franchisor's quarterly and ongoing FDD update obligations?

What are a franchisor’s quarterly and ongoing FDD update obligations?

Both federal and state law require updates to the FDD when a “material change” occurs. Federal and state requirementscan differ. Below is an overview of the types of representations, omissions, or practices that can be deemed material and require an amendment to your FDD under the FTC Rule or state franchise laws.

FEDERAL

The FTC requires you to amend your FDD following a material change within a “reasonable time” after the close of the quarter in which the material event occurred. You must also notify any prospective franchisee of any material changes.

Under the FTC Rule, a material change is anything that is reasonably likely to affect a prospect’s conduct or decisions with respect to purchasing the franchise. The FTC provides the following examples of material changes, but this list should not be considered exhaustive:

Recent filing of a bankruptcy petition	Changes in franchisor’s management
Changes to fees imposed under the Franchise Agreement	Changes affecting information in Item 19 (example: new laws affecting costs or ability to generate certain revenue streams)
Material change to initial investment estimate	Material change to previously audited financial information
Material adverse change in financial conditionFiling of a lawsuit against franchisor or its management that may have a negative effect on its financial condition	Material adverse change in financial condition

STATE

STATE	WHEN TO FILE	EXAMPLES OF MATERIAL EVENTS
California	Promptly after the occurrence of a material event	California does not provide specific examples, although it does require an amendment if you need to submit additional franchise seller disclosure forms. The amended FDD is not effective until approved; however, you may disclose a prospect with the amended FDD while the amendment is pending so long as you comply with California regulations
Hawaii	At least 7 days before any sale occurs	Termination of the greater of: (i) 1% or (ii) 5 of your franchises system-wide during any 3-month period Termination of the lesser: of (i) 15% or (ii) 2 of the franchise system’s Hawaii franchisees Change in franchisor’s corporate name Change in franchisor’s state of incorporation Change in franchisor’s control (i.e., ownership of the franchise entity or ownership of a parent company)
Illinois	Within 30 days after the close of each quarter in which a material change occurred	A change in which there is a substantial likelihood that a reasonable prospective purchaser would consider it significant in deciding to purchase or not purchase the franchisee, including, without limitation: any increase or decrease in the initial or continuing fees charged by the seller (for example, the initial franchise fee, royalty, or brand marketing fund contribution); a change of more than 15% in the number of requests for refund, rescission, termination or cancellation of franchises sold which were received by the seller in the most recent quarter since the effective date of the current disclosure document; a change in franchise entity’s management; a change in franchisor or franchisee obligations under the contract or agreement of sale or related agreements; a decrease in franchisor’s income or net worth of more than 25%; or additional litigation or a significant change in the status of litigation, including, without limitation: the filing of a complaint, or amendment thereto, alleging or involving violations of any business opportunity or franchise law, fraud, embezzlement, fraudulent conversion, restraint of trade, unfair or deceptive practices, misappropriation of property or breach of contract the entry of any injunctive or restrictive order relating to any business opportunity; or the entry of any injunction under any federal, state, Canadian or Mexican business opportunity, franchise, securities, anti-trust trade regulation or trade practice law the entry of a judgment that has or would have any significant financial impact on the seller. Such a judgment is considered to have a significant financial impact if it equals 15% or more of the current assets of the seller and its subsidiaries on a consolidated basis
Indiana	Within 30 days of any material change	Termination, closing or non-renewal of 10% of your franchisees, regardless of location, within any 3-month period Termination, closing or non-renewal of 10% of your franchisees located in Indiana within any 3-month period Purchase by franchisor of either 10% of its existing franchisees, regardless of location, or 10% of its existing franchisees located in Indiana, within any 3-month period Any change in franchisor’s control, corporate name, state of incorporation, or reorganization Introduction of any new product, service, model or line involving an additional investment by franchisees that exceeds 20% of the average investment made by all franchisees immediately before the introduction of the new product, service, model, or line Discontinuation or modification of the marketing plan/marketing system of any product or service if average total sales attributable to the product of service exceed 20% of the average annual gross sales of existing franchisees immediately before discontinuation or modification of the marketing plan/marketing system Change in fees Significant change in the obligations of a franchisee to purchase items from franchisor or its designated sources; the limitation or restrictions on goods or services that a franchisee may offer; the obligations to be performed by franchisor or a franchisee; or the franchise contract or agreement, including any amendments to the franchise contract or agreement
Maryland	Promptly after a material change	Termination or cancellation of more than 10% of Maryland franchisees in any 3-month period Termination or cancellation of more than 5% of U.S. franchisees in any 3-month period Reorganization of the franchisor entity Change in control, corporate name, or state of incorporation of the franchise entity Commencement of a new product, service, or model line requiring (directly or indirectly) additional investment by a franchisee
Minnesota	Within 30 days of a material change	Termination, closure or non-renewal during any 3-month period of (a) 10% of franchise outlets regardless of location or (b) 10% of franchise outlets located in Minnesota Franchisor’s repurchase of 10% or more of its franchisees during any 3-month period (either 10% of all franchise outlets regardless of location or 10% of franchise outlets in Minnesota) Change in control, corporate name or state of incorporation Reorganization of franchisor Introduction of a new product, service or model line involving additional investment by the franchisee that exceeds 20% of the average investment made by all franchisees Discontinuation or modification of the marketing plan or system of any product or service where average total sales from such product or service exceeds 20% of average annual gross sales of existing franchisees Change in fees charged by franchisor Significant change in: Franchisee obligations to purchase items from franchisor or its designated sources; Limitations or restrictions on goods or services a franchisee may sell; Franchisor’s obligations; or
New York	Promptly after a material change	Termination, closure or failure to renew during any 3-month period of the lesser of 10 franchised outlets (regardless of location); or 10% of franchised outlets (regardless of location) Franchisor’s reacquisition of 5% or more of its existing franchises during a consecutive 6-month period Change in fees Significant adverse change in business condition of franchisor or in any of the following: (a) obligation of franchisee to purchase from designated sources; (b) restrictions on goods or services franchisee may offer; (c) franchisor’s obligations; (d) terms of the franchise agreement; (e) change in franchisor’s accounting system resulting in 5% or greater change in net profit/loss in any 6-month period; or (f) service, product or model line Change to audited financial statements of the preceding fiscal year The amended FDD is not effective until approved; however, you may disclose a prospect with the amended FDD while the amendment is pending so long as you comply with New York rules and regulations, which include, among other things, opening an escrow account.
North Dakota	Promptly after the occurrence of a material change	North Dakota law does not provide specific examples of a material change
Oregon	Not applicable	Oregon law does not provide specific examples of a material change.While Oregon is not a registration state, you must redisclose any prospect if you amend your FDD due to a material change. Oregon law does not provide specific examples of a material change
Rhode Island	Promptly after the occurrence of a material change	Rhode Island law does not provide specific examples of a material change
South Dakota	Not applicable	South Dakota law does not provide specific examples of a material change. You must update your FDD when a material change occurs but are not required to file the amended FDD
Virginia	Within 30 days of the occurrence of a material change	A change of fact, circumstance, or condition having a substantial likelihood of influencing a reasonable prospective franchisee in the making of a decision relating to the purchase of a franchise
Washington	“As soon as reasonably possible”	Washington law does not provide specific examples of a material change
Wisconsin	Within 30 days after the occurrence of a material change	Termination, closure or non-renewal during any 3-month period of (a) greater of 1% or 5 of all franchises regardless of location; or (b) lesser of 15% or 2 franchises located in Wisconsin Franchisor’s repurchase of 5% or more of its franchisees during any 3-month period Change in franchisor’s control, corporate name or state of incorporation Reorganization of the franchisor entity Introduction of a new product, service or model line involving additional investment by a franchisee Discontinuation or modification of the marketing plan/system of any product or service where total sales from such product/service exceeds 20% of the gross sales of the franchisor on an annual basis

The federal franchise law (“FTC Rule”) does not require re-disclosure after a material change unless an updated FDD is requested by the prospective franchisee. Manyregistration states require re-disclosure for certain specific changes. Although re-disclosure is not required in most non-registration states, a franchisee may still have a claim under state law if you misrepresent or fail to disclose a material fact. We recommend re-disclosure to any prospect, no matter where located, upon the occurrence of a material change.

Please contact us if you have any questions about this information or to discuss the potential materiality of a previously-occurred or anticipated system change.