Why Ontario Should Get Active in NASAA -- Franchise Lawyer Canada
Why Ontario Should Get Active in NASAA -- Franchise Lawyer Canada
Why Ontario Should Get Active in NASAA
Executive Summary
In 2000, Ontario introduced legislation to regulate a segment of the economy responsible for approximately 40 percent of all retail sales. With very little formal study, Ontario introduced flawed legislation into a marketplace that was ill-prepared. We stand on the brink of a painful period of learning in the school of hard knocks. There is an easier, softer way.
Early Franchise Regulation In The U.S.
Franchising -- at least as we currently conceive of it -- is generally considered to have evolved from the early 20th-century American economy, as a means of rapidly expanding soft drink bottling and gasoline distribution. “Business format” franchising, its most visible current guise, took off in the 1960s. While some of these brands prospered, many did not. Even brand-name franchise systems utilized questionable earnings information and other sales practices; the so-called “fly by night” franchise systems were simply a method to fleece helpless would-be investors.
In situations where a defendant could be identified, aggrieved parties turned to the courts for redress using laws of general application (contracts, fraud, misrepresentation, etc.). Usually, there was none.
Early efforts to apply securities law to franchising proved unsuccessful. The active involvement of the franchisee/investor in the management of the franchised business took a typical franchise out of the category of investment security that the state Blue Skies laws were meant to regulate.
In 1971, California adopted franchise-specific legislation, closely modeled on its securities statute, that required comprehensive presale disclosure to prospective investors. Fifteen other states quickly followed California, representing about 50 percent of the U.S. population at the time.
In the U.S., jurisdiction over franchising is shared between state and federal government. The unsavory practices that were complained of in the franchise industry had also drawn the attention of the United States Federal Trade Commission. The FTC investigation into franchising practices reported as follows:
The franchise industry…has been plagued by numerous cases of abuses and misrepresentations aimed at unsophisticated prospective franchisees. Widespread instances have been documented involving such malpractices as high pressure franchise sales tactics, unscrupulous and inexperienced franchisors, financially unstable franchisors, hidden fee requirements and kick-backs, failure to provide information on services and training to be furnished to the franchisee, and use of coercive methods to get quick large deposits. ... franchisees’ complaints frequently involve both material misrepresentations and nondisclosure of material facts on the part of franchisors. In addition, a large number of comments on the record describe franchisor conduct wherein the franchise offering itself was fraudulent, resulting in serious economic harm to franchisees. [see CCH BFG ¶ 6304]
In 1979, the FTC responded with its Franchise Rule, applicable in all 50 states (and superseding any existing state law that provided a lower standard in any respect). The FTC Rule requires mandatory presale disclosure. The FTC Rule does not provide any private right of action, does not provide for any regulatory review or registration of the disclosure document, and is manifestly of a “consumer protection” nature.
Almost without exception, state laws have continued to be administered by securities regulators who have vigorously enforced their provisions -- including penalties. The review process leading up to the registration of a disclosure document with a state regulator can be an arduous affair.
NASAA
Franchising, by its nature, is multijurisdictional. It is the means par excellence of expanding product and service distribution nationally and internationally.
It is trite to say that the regulation of anything presents a hindrance to that activity (although an argument can be made that, on a macroeconomic scale, the regulation of franchising is good for the industry as a whole). While the cost of compliance with the laws of the single jurisdiction might be supportable, the exponential increase in cost--coupled with the almost insurmountable task of administrative compliance--brought on by the requirement to comply with a hodgepodge of state franchise legislation was not supportable.
It's worth mentioning at this point that the direct regulation of franchising occurs in one of three different ways. The first is to mandate and stipulate the format for presale disclosure to prospective franchisees. The second is to require and maintain a system for the vetting and registration of the disclosure document with a regulatory body. The third is to regulate the ongoing relationship between franchisor and franchisee, in such areas as fair dealing, the right to associate, good cause for termination, post-term restrictive covenants, etc.
In 1975, the Midwestern Securities Commissioners Association, an organization of state securities regulators, attempted to harmonize their disclosure requirements to enable franchisors to produce a single disclosure documents for use in each of their states. The one format which they agreed upon as embodying the minimum disclosure requirement of each of their respective state statutes was dubbed the “uniform franchise offering circular” or UFOC -- a moniker that stuck. The MSCA's Model Franchise Legislation met with little acceptance.
The UFOC format was quickly adopted by all of the U.S. registration states. With the promulgation of the FTC Rule 1979, even the FTC accepted the UFOC format as an alternative acceptable form of disclosure to the FTC's own idiosyncratic format. Practically speaking, the UFOC format is almost universally employed in the U.S., and the FTC is poised to discard its own franchise disclosure rules in favour of the UFOC format.
In 1981, the North American Securities Administrators Association assumed the mantle of franchise regulator to the regulators. NASAA, which traces its origins back to 1919, is concerned primarily with the harmonization of securities laws in North America. Its members include all 50 states, all 10 Canadian provinces and Mexico. NASAA's involvement in franchising is overseen by its Franchise and Business Opportunities Committee, currently chaired by Dale Cantone of Maryland, and consisting of regulatory members from five other states. In 1993 , NASAA updated the form of UFOC originally developed by the MSCA (originally dubbed the "NUFOC" but since happily re-baptised as simply UFOC).
NASAA also promulgated its own Model Franchise Investment Act. That Model Act contained extensive franchise relationship content , including obligations of good faith, nondiscrimination, good cause termination requirements , etc. Like its MSCA predecessor, this Model Act has not seen the light of day. Two factors have combined to radically curtail the regulation of franchising since the heyday of this activity in the early seventies. First, the initial array of presale disclosure legislation appears to have had desired salutary effect. Second, budget-conscious governments have eschewed forms a regulation that actually require the involvement of regulators, in favour of legislation that promotes marketplace regulation. The second trend is probably responsible for two states -- Indiana and Michigan, who were originally full-blown registration states, becoming notice filing states only.
Why Ontario Should Get Active in NASAA Franchise Lawyer Canada - To learn more about this author, visit Peter Macrae Dillon's Website.
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ONTARIO’S FRANCHISE REGULATORY REGIME: THROUGH A GLASS DIMLY
Why Ontario Should Get Active in NASAA
Executive Summary
In 2000, Ontario introduced legislation to regulate a segment of the economy responsible for approximately 40 percent of all retail sales. With very little formal study, Ontario introduced flawed legislation into a marketplace that was ill-prepared. We stand on the brink of a painful period of learning in the school of hard knocks. There is an easier, softer way.
Early Franchise Regulation In The U.S.
Franchising -- at least as we currently conceive of it -- is generally considered to have evolved from the early 20th-century American economy, as a means of rapidly expanding soft drink bottling and gasoline distribution. “Business format” franchising, its most visible current guise, took off in the 1960s. While some of these brands prospered, many did not. Even brand-name franchise systems utilized questionable earnings information and other sales practices; the so-called “fly by night” franchise systems were simply a method to fleece helpless would-be investors.
In situations where a defendant could be identified, aggrieved parties turned to the courts for redress using laws of general application (contracts, fraud, misrepresentation, etc.). Usually, there was none.
Early efforts to apply securities law to franchising proved unsuccessful. The active involvement of the franchisee/investor in the management of the franchised business took a typical franchise out of the category of investment security that the state Blue Skies laws were meant to regulate.
In 1971, California adopted franchise-specific legislation, closely modeled on its securities statute, that required comprehensive presale disclosure to prospective investors. Fifteen other states quickly followed California, representing about 50 percent of the U.S. population at the time.
In the U.S., jurisdiction over franchising is shared between state and federal government. The unsavory practices that were complained of in the franchise industry had also drawn the attention of the United States Federal Trade Commission. The FTC investigation into franchising practices reported as follows:
The franchise industry…has been plagued by numerous cases of abuses and misrepresentations aimed at unsophisticated prospective franchisees. Widespread instances have been documented involving such malpractices as high pressure franchise sales tactics, unscrupulous and inexperienced franchisors, financially unstable franchisors, hidden fee requirements and kick-backs, failure to provide information on services and training to be furnished to the franchisee, and use of coercive methods to get quick large deposits. ... franchisees’ complaints frequently involve both material misrepresentations and nondisclosure of material facts on the part of franchisors. In addition, a large number of comments on the record describe franchisor conduct wherein the franchise offering itself was fraudulent, resulting in serious economic harm to franchisees. [see CCH BFG ¶ 6304]
In 1979, the FTC responded with its Franchise Rule, applicable in all 50 states (and superseding any existing state law that provided a lower standard in any respect). The FTC Rule requires mandatory presale disclosure. The FTC Rule does not provide any private right of action, does not provide for any regulatory review or registration of the disclosure document, and is manifestly of a “consumer protection” nature.
Almost without exception, state laws have continued to be administered by securities regulators who have vigorously enforced their provisions -- including penalties. The review process leading up to the registration of a disclosure document with a state regulator can be an arduous affair.
NASAA
Franchising, by its nature, is multijurisdictional. It is the means par excellence of expanding product and service distribution nationally and internationally.
It is trite to say that the regulation of anything presents a hindrance to that activity (although an argument can be made that, on a macroeconomic scale, the regulation of franchising is good for the industry as a whole). While the cost of compliance with the laws of the single jurisdiction might be supportable, the exponential increase in cost--coupled with the almost insurmountable task of administrative compliance--brought on by the requirement to comply with a hodgepodge of state franchise legislation was not supportable.
It's worth mentioning at this point that the direct regulation of franchising occurs in one of three different ways. The first is to mandate and stipulate the format for presale disclosure to prospective franchisees. The second is to require and maintain a system for the vetting and registration of the disclosure document with a regulatory body. The third is to regulate the ongoing relationship between franchisor and franchisee, in such areas as fair dealing, the right to associate, good cause for termination, post-term restrictive covenants, etc.
In 1975, the Midwestern Securities Commissioners Association, an organization of state securities regulators, attempted to harmonize their disclosure requirements to enable franchisors to produce a single disclosure documents for use in each of their states. The one format which they agreed upon as embodying the minimum disclosure requirement of each of their respective state statutes was dubbed the “uniform franchise offering circular” or UFOC -- a moniker that stuck. The MSCA's Model Franchise Legislation met with little acceptance.
The UFOC format was quickly adopted by all of the U.S. registration states. With the promulgation of the FTC Rule 1979, even the FTC accepted the UFOC format as an alternative acceptable form of disclosure to the FTC's own idiosyncratic format. Practically speaking, the UFOC format is almost universally employed in the U.S., and the FTC is poised to discard its own franchise disclosure rules in favour of the UFOC format.
In 1981, the North American Securities Administrators Association assumed the mantle of franchise regulator to the regulators. NASAA, which traces its origins back to 1919, is concerned primarily with the harmonization of securities laws in North America. Its members include all 50 states, all 10 Canadian provinces and Mexico. NASAA's involvement in franchising is overseen by its Franchise and Business Opportunities Committee, currently chaired by Dale Cantone of Maryland, and consisting of regulatory members from five other states. In 1993 , NASAA updated the form of UFOC originally developed by the MSCA (originally dubbed the "NUFOC" but since happily re-baptised as simply UFOC).
NASAA also promulgated its own Model Franchise Investment Act. That Model Act contained extensive franchise relationship content , including obligations of good faith, nondiscrimination, good cause termination requirements , etc. Like its MSCA predecessor, this Model Act has not seen the light of day. Two factors have combined to radically curtail the regulation of franchising since the heyday of this activity in the early seventies. First, the initial array of presale disclosure legislation appears to have had desired salutary effect. Second, budget-conscious governments have eschewed forms a regulation that actually require the involvement of regulators, in favour of legislation that promotes marketplace regulation. The second trend is probably responsible for two states -- Indiana and Michigan, who were originally full-blown registration states, becoming notice filing states only.
Why Ontario Should Get Active in NASAA Franchise Lawyer Canada - To learn more about this author, visit Peter Macrae Dillon's Website.
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Anne BarrAnne Barr has over 26 years experience in sales and marketing, six years as a franchisee. She has assisted over 367 business owners and purchasers to achieve their goals in career change, transition and exit strategy. She holds the designation of Certified Franchise Executive from the International Franchise Association, Certified Business Intermediary from the International Business Brokers Association and Board Certified Broker from the Texas Association of Business Brokers. Anne is active in professional organizations, networking groups and volunteers for non-profit entities. As owner/operator of four successful businesses, Anne has proven people skills and enjoys helping clients find the right "fit" in business ownership. Visit www.FranchiseOpportunitySpecialist.com for more information about me and my company. - Visit Anne Barr's Website |
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John PowerJohn Power, founder of Biltmore Franchise Consulting, has extensive experience developing and marketing franchises and business opportunities. He has been in and around franchising for over twenty years. From 1980 through 1990 he conceptualized, organized, and developed the American Video Association. He grew AVA to 2,000 national members, before selling the company it 1990. It was later merged into another home video marketing company. From 2000 to 2005 he worked as a contract marketing and human resources consultant to several local and national companies. In 2005 Mr. Power began working as a franchise development consultant on a full-time basis. Since that time he has helped more than three dozen companies initiate and develop their franchising program. He notes that there are many companies interested in developing a franchise program, and who need his specialized assistance. Mr. Power is a “hands-on” franchise consultant. He said, “I am the ‘nuts and bolts’ person who tends to the details for my clients.” Mr. Power holds a B.S. degree with a major in Marketing. See: www.biltmorefranchise.com You may contact Mr. Power at: jpower@biltmorefranchise.co - Visit John Power's Website |
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John BrennanJohn Brennan Ed.D. Dr. Brennan is President of Interpersonal Development, LLC, a training and development firm. Interpersonal Development has provided sales training and coaching to more than 3,000 sales reps from over 100 companies. A native of Australia, Dr. Brennan received his doctorate from the University of Rochester. His dissertation researched the effectiveness of Behavioral Modeling Technology in training people in interpersonal skills. While he has spent most of his career designing or delivering training, he was also a Vice-President of Sales of a training and development franchise with operations in 25 markets. Dr. Brennan has designed and delivered sales training in North America, Asia, Europe, Australia and the Middle East. He has been a guest speaker at numerous national and regional professional conferences. When Microsoft wanted Best Practices articles on sales for their web site, they called Dr. Brennan. The results are at http://office.microsoft.com/en-us/FX011387391033.aspx His firm’s clients have included Volvo, The Prudential, Merrill Lynch, Eastman Kodak, Gannett, Equifax Europe, the Economist Group and countless small businesses. - Visit John Brennan's Website |
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Jay Kubassek(Jay's Full Bio: EvanCarmichael.com/jaykubassek) In five years, Canadian-born entrepreneur Jay Kubassek went from selling mufflers at a Midas franchise to revolutionizing Internet marketing with the 2004 launch of CarbonCopyPRO, a online marketing education company, now worth over $20 million with customers in over 160 countries.
As an independent film producer, his upstart film fund Aliquot Films is currently producing a films with Spike Lee and Abel Fererra (starring Ethan Hawke and Dennis Hopper.)
Jay's entrepreneurial spirit is irrepressible. He’s the owner of five companies, a professional speaker and trainer, international real estate developer/investor, extreme sport enthusiast and emerging philanthropist. Jay resides in NYC with his wife Jamie, son Milo and dog Cooper. Visit Jay's official website: www.JayKubassek.com - Visit Jay Kubassek's Website |
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