Deacons on franchise legislation

According to Deacons , Australia is a member of a small, but growing, club of nations which have embraced dedicated franchise regulation. Although there are massive differences in the nature, extent and content of regulation, each regulated jurisdiction mandates prior disclosure. Today prior disclosure is quickly becoming accepted throughout the franchising world as an appropriate and uncontroversial prerequisite to the offering of a franchise. Its increasing adoption has been encouraged by the UNIDROIT Model Franchise Disclosure Law and by the positive experiences of those countries with such laws.

However, although the principle of disclosure is widely accepted there is little uniformity in the detail – in the mechanics of communicating disclosure and in the extent of the disclosure required. Australia, along with the US and Malaysia, is one of the small minority of the regulated countries which mandates prior disclosure through a prescriptive and comprehensive prior disclosure document. But, unlike some US states and Malaysia, Australia’s Franchising Code of Conduct does not require registration of prior disclosure documents. Australia’s prior disclosure provisions are closely modelled on the US UFOC – Uniform Franchise Offering Circular – model. Although since 1979 the US federal regulatory agency, the Federal Trade Commission, has pursuant to its powers under the US Federal Trade Commission Act prescribed ‘Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures’ (the FTC Rule), 15 US states regulate the offer and sale of franchises under a model first developed in California in 1970. These states – known as the ‘franchise law states’ or the ‘registration states’ – have developed a uniform disclosure format known as the UFOC together with comprehensive guidelines for its preparation. Australia adopted the UFOC disclosure protocol in terms of both the content of disclosure and the forms in which it is to be provided but did not adopt the UFOC registration requirement – a concession for which Australian franchisors should be eternally grateful. The specific requirements in the registration states differ slightly but in all cases a ‘package’ of documentation (including not only the ‘offering circular’, known in Australia as the ‘disclosure document’, but also the franchise agreement and other statements and forms as well as the filing fees) must be submitted to designated state officials.

Andrew Sherman in a ‘Special Report on US Franchising’ prepared for Austrade notes: “The level of scrutiny applied by the examiner in reviewing the offering materials will vary from state to state and from franchisor to franchisor. The sales history, financial strength, litigation record, reputation of legal counsel, time pressures and workload of the examiner, geographic desirability of the state, and the general reputation of the franchisor will have an impact on the level of review and the timetable for approval. Franchisors should expect to see at least one ‘comment letter’ from the examiner requesting certain changes or additional information as a condition of approval and registration. The procedure can go as quickly as six weeks or as slowly as six months.”

And there’s more. Ongoing reporting obligations, filing of amendments to the UFOC for material changes, annual (and in some cases quarterly) filings, advance approval of advertising materials for attracting franchisees and filing of salesperson disclosure forms are also required.

The Malaysian disclosure requirements may be regarded as even more draconian. Malaysia’s Franchise Act 1997 is closely modeled on the Franchising Code of Conduct but the disclosure requirements are supplemented by the requirement that the franchisor, prior to making an offer, register the franchise with the Registrar of Franchises. The application must be made on the prescribed form and must annex a completed disclosure document, the franchise agreement, the operations and training manuals, audited accounts, financial statements, auditor and director’s reports as well as any such other additional information or documents as may be required by the Registrar for determination of the application. An application that is approved may be made subject to any such condition as the Registrar may impose. The Registrar may by written notice suspend, terminate, prohibit or deny the sale or registration of the franchise. Annual reports containing updated disclosures must be filed. The UFOC registration states and Malaysia clearly impose a heavy burden on franchisors which should not be adopted in Australia. Bureaucratic red tape is a sufficiently endemic problem without adding to it. There is no evidence in any event that the level of bureaucratic interference and the cost would be justified on any cost/ benefit basis. I nevertheless strongly support a proposal requiring the filing of disclosure documents with an appropriate authority. Why? Because of the rich vein of data that can be mined from the collective information – over 250 specific items of disclosure – in each Australian disclosure document.

In the absence of a comprehensive and accurate database of information relating to all aspects of franchising, governments cannot properly assess appropriate regulatory responses, prospective franchisors and franchisees are impeded in their capacity to determine appropriate courses of action and the franchising sector generally is deprived of the information on which its orderly development should be based.

In its 1990 report on ‘Franchising in the US Economy’ the US House of Representatives Committee on Small Business noted: “Despite its growing significance, there is a surprising lack of comprehensive and accurate information concerning all aspects of franchising nationally.”

At that time there had been a number of statistical reports on franchising by government agencies, universities, private organisations and by the International Franchise Association itself. The limitations of such reports were nevertheless clearly noted by the Educational Foundation of the IFA in its 1998 ‘Profile of Franchising’:

“For years, those in franchising and those studying it have desired reliable data on the realities of franchising as seen in the business community. Until now, most attempts at such an overview have been based on survey results and, as all researchers know, the return rates on surveys tend to be discouragingly low. That was the experience of the Commerce Department, the IFA and the major accounting firms and academic institutions...

Moreover, some felt that the picture painted by such survey returns was misleadingly positive because those having business difficulties would be less likely to take the time to complete and return surveys.”

Not surprisingly the IFA Educational Foundation turned to the UFOC registration states. For its 1998 ‘Profile of Franchising’ it switched from a survey-based study, dependent on franchisor response, to one based on objective disclosures found in the UFOCs which allowed an objective compilation of facts drawn from publicly available documents. Because the 15 UFOC states require franchise companies to register their UFOCs with state government agencies, and must attest to the accuracy and completeness under penalty of law,

“Using these documents has generated a volume of highly reliable data unmatched in any prior survey-based studies”.

The Australian franchise sector owes a huge debt of gratitude to Colin McCosker (1998, 1999), Lorelle Frazer (1998, 1999, 2002, 2004) and Scott Weaver (2002, 2004) who, with FCA support, have conducted a series of surveys of Australian franchising practices and performance. The ‘Franchising Australia’ surveys are a very valuable addition to the information bank but the quality, and quantity, of data would be considerably enhanced if the report was based not on survey information but on objective data drawn from disclosure documents. Because franchising is a method of doing business and not a separate industry group, franchising is not captured in government data collection systems and there is debate in Australia even on the most fundamental of all statistics – the number of franchise systems. Garry Williamson of the Franchise Centre, for example, records 1541 franchise systems on his recently updated database.

To harness the information that resides in disclosure documents would of course require disclosure documents to be filed with an appropriate authority. There is the concern, eloquently expressed in 1970 by a Wollongong solicitor, P Grainger, when representing a client that, “As an ordinary Australian he was naturally suspicious of authority”.

There may be concern that the filing of disclosure documents may lead to registration, and audit and vetting but this is not a logical or necessary development.

Consideration would have to be given as to the appropriate repository and whether they are public documents readily available to the community generally and commercial organisations (as in the case of UFOCs) or whether they are available only for data collection and research purposes by bona fide researchers. Given that Australia’s disclosure regime operates nationally we would have more accurate information than is available in the US where the comprehensiveness of the information is limited by the fact that only 15 states require registration of UFOCs.

No less an authority than Ronald Reagan once commented that the nine most terrifying words in the English language are “I’m from the government, and I’m here to help”. In this context to ask the government to impose an additional, albeit light-handed, bureaucratic requirement on the franchising sector may seem particularly bold. However, at a time when the federal Small Business Minister is reportedly considering amendments to the code’s prior disclosure provisions (‘Franchise disclosure on agenda – Australian Financial Review, 29 March 2005) the question of filing of disclosure documents in the interests of better and more comprehensive sector data should be seriously considered.

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