Changes in Item 19 Disclosure Requirements Take Effect Next Week

We have previously written about the changes required to Item 19 disclosures based upon the adoption in May of the new NASAA financial performance representation (FPR) commentary. If your franchise disclosure document (FDD) has an effective date of May 9 or later, then you only have until next Saturday, Nov. 4, to update the Item 19 disclosures in your FDD. If your effective date is May 8 or earlier, then you are not required to comply with the commentary until 120 days after the end of your fiscal year, which is basically when you must update and renew your FDD. However, if you amend your FDD before your next renewal, regulators in some of the registration states will require Item 19 be updated at that time.

I served on the NASAA task force that made the recommendations for the FPR commentary and therefore have been working with these changes for the last four years. For some of our clients, the changes simply mean adding definitions to some of the terms used in Item 19, and for those giving averages, adding medians. For those who give average sales information, there is also a requirement to list the high and low results for the system, a requirement that should be very favorable to franchisors as it allows you to disclose the highest revenue numbers in your system. For systems that use results from company-owned outlets in their FPR, the requirements for compliance are more extensive. O the other hand, if you only had company-owned operations and were told by a registration state that this was not sufficient to enable you to prepare an Item 19 FPR, the new commentary eliminates that objection and allows you to begin making FPRs. Thus, whether you currently have an Item 19 disclosure, or would simply like to have one and have not previously been able to do so, it is time to consult with counsel familiar with the commentary to be certain you take advantage of, and comply with, the commentary on or before the date required by law.