Electronic UFOC Disclosure
Franchising World, August 2005
By Gary Duvall
Jerrod Sessler, CEO of HomeTask.com, says: "There are obvious efficiency benefits of electronic disclosure of the UFOC, and we also use it as a yard stick to measure our candidates’ technical comfort and ability. The HomeTask Handyman franchisees that embrace technology find greater success more quickly. This combined with our no-touch lead weed process enables us to give the right prospects what they want when they want it and it keeps our sales team focused on building relationships with the right folks."
Electronic delivery of UFOCs can have the following advantages, for franchisors, suppliers and franchisees:
Advantages for Franchisors
· Substantial savings in printing, mailing and handling costs.
· Faster response to franchisee prospects.
· Reducing handling, storage and record keeping time and costs.
Advantages for Franchisees
· Greater access to UFOCs due to greater willingness of franchisors to share UFOCs sooner and with more people.
· Availability of word search to find key information and documents.
· Ability to more quickly and inexpensively share UFOCs with investors and advisors.
Advantages for Franchise Suppliers
· Quicker and less expensive access to UFOCs.
· For lawyers who draft UFOCs, less printing, mailing and handling costs.
· Less reliance on outside services for access to UFOCs and UFOC data.
Legality of Electronic UFOCs
The federal law designed to facilitate electronic commerce, the Electronic Signatures In Global and National Commerce Act, became effective on Oct. 1, 2000. E-Sign eliminates barriers to the use of electronic documents in commercial transactions. On April 1, 2003, the North American Securities Administrators’ Association Franchise and Business Opportunity Project Group issued a proposed statement of policy regarding electronic delivery of franchise disclosure documents. The text is located at www.NASAA.org. California recently modeled its electronic disclosure regulations on the NASAA electronic delivery proposal.
These legal developments opened up the door to electronic disclosure, and more and more franchisors are walking through that door. The August 2004 Federal Trade Commission Staff Report proposing changes to the Franchising Rule takes a position consistent with NASAA’s electronic delivery proposal and would permit electronic delivery without significant impediment.
How to Deliver Electronic UFOCs
NASAA’s proposal provides that a franchisor may deliver a franchise disclosure document by electronic means (Internet, e-mail, diskette and so on) if the disclosure document is:
· Delivered as a single document;
· Has no extraneous content;
· Has no links to or from external documents;
· Is delivered in a form that enables the recipient to store, retrieve, and print the documents;
· Conforms to the current requirements of state and federal disclosure law and;
· The franchisor can prove that it delivered the disclosure document electronically.
These rules require consolidating the UFOC into one electronic file, usually a pdf file, an additional instruction page with options for hardware and software, and an additional receipt with instructions for signing and returning.
What are some of the hurdles to overcome in providing electronic disclosure?
Nick Whitehead, president of Learning Centers of America, Inc., states that: “Our attempts at electronic disclosure have been unsuccessful. We were one of the first companies to use Web-based UFOC disclosure. For us, it was great. For the potential franchisees, it was terrible. Comments ranged from: slow Internet connections, reams of printer paper, slow ink jet printers, hard to read on computer, and so on. In the long run, we have gone back to hard copy to disclose. Our next attempt will be via CD-DVD and we will see how that goes.”
Depending on the demographics of the industry, some prospective franchisees may still not have adequate software, hardware or Internet connections to make electronic delivery feasible.
Some franchisors prefer to meet face-to-face with a prospect, as in a discovery day setting, and feel that there is a formality or “ceremonial value” to delivering a lengthy and detailed UFOC. However, some of the ceremonial value can be reached by delivering a diskette or a password, together with a paper-based marketing package.
Other franchisors do both forms of UFOC delivery. For example, paper delivery is made first, at a personal meeting, and electronic delivery, usually by e-mail or by password-protected portion of the franchisor’s Web site, is made thereafter. This allows prospects to study and search the UFOC in the way that best suits their needs. Some do the electronic delivery first, and the paper delivery is made later at a time most convenient for both parties, such as the discovery day date.
While nearly all franchisors still hold face-to-face meetings in the process of granting a franchise, in some industries the process is complex and lengthy. UFOC delivery can be made in a timely fashion at minimum expense to either party, through an e-mail, diskette delivery, or access to a franchisor’s Web site. For example, some franchisors with sophisticated franchisees and complex offering circulars, such as Marriott Hotels, have chosen to deliver the UFOC by mail using a CD. The Marriott UFOCs contained on the CD comprise many separate brands UFOCs and would be nearly 1,000 pages if delivered in paper.
Ruk Adams, senior vice president of The Little Gym International, Inc. says: “While we don’t currently use electronic disclosure, we are investigating using electronic disclosure for renewals, transfers or re-disclosures.”
While some franchisors merely post their offering circular on their Internet, this is not common. More commonly, a franchisor will not disclose the offering circular on a public Web site, but rather will maintain the offering circular in a specific password-protected portion of their Web site. This is to enable the franchisor to obtain an application and qualify the prospect before delivering the offering circular. There are also third-party services that will provide similar security features and act as a repository for franchisor offering circulars.
As we move closer to what Microsoft’s Bill Gates refers to as the “paperless society,” it is clear that electronic delivery of offering circulars will increase. Franchisors are well advised to develop a strategy for such use of e-commerce.
Gary R. Duvall, CFE, is a partner at the law firm of Dorsey & Whitney. He can be reached at 206-903-8700 or email@example.com.