Federal franchise law imposes many requirements on franchisors that are intended to protect prospective franchisees from fraud and deception in connection with the offer and sale of franchises. Once the prospective franchisee buys a franchise, however, almost all federal protections disappear. Federal franchise law does not regulate the substantive terms of a franchise relationship. It’s primarily a disclosure law and only requires franchisors to disclose certain material information to prospective franchisees. The theory underlying this approach to regulation is that informed investors can adequately determine for themselves whether a specific franchise offer is the real deal or a real dud or something in between.
- making claims that contradict the information required to be disclosed in the FDD;
- making misrepresentations about who purchased or operated the franchise or who can make an independent and reliable report about the franchise or the experiences of any current or former franchisees; and
- providing earnings claims that lack a reasonable basis and written substantiation.
Mike Sheehan is a franchise consultant and attorney. He is the president of Focus Ventures (www.focusonfranchise.com) and formerly served as a securities attorney and as general counsel for a Fortune 100 financial services company. His Franchise Focus Blog (www.franchisefocus.blogspot.com) focuses on helpful information, tips and current news for prospective franchisees.