Amendments to both the franchise legislation, the Arthur Wishart Act (Franchise Disclosure), 2000, and to its General Regulation will be brought into force on September 1, 2020. These amendments are welcome news to franchisors by bringing clarity to certain provisions of the Act and allowing for a less rigid disclosure requirement in certain circumstances. In general, the changes:
- Clarify the application of certain exemptions from disclosure under the Act;
- Exempt from a franchisor's disclosure obligation, receipt of a fully-refundable deposit;
- Allow for the entering into of certain ancillary agreements without triggering a franchisor's disclosure obligation;
- Requiring a certificate be included in a statement of material change;
- Clarify the accounting standards for financial statements which will permit financial statements prepared in accordance with U.S. GAAP; and
- Specify the thresholds for exemptions from disclosure requirements based on "total initial investment" and the manner for determining "total initial investment" for such exemptions.
Below is a detailed summary of some of these key changes to the Act and the Regulation.
- Deposits, Confidentiality and Site Selection Agreements
Payment of a fully-refundable deposit, the entering into of a confidentiality agreement or the entering into of an agreement to designate a location/site/territory of a proposed franchised business will no longer trigger a franchisor's disclosure obligation under the Act. So long as the criteria are met, a deposit can be taken or such an agreement entered into prior to a franchisor providing a prospective franchisee with a disclosure document. As currently drafted, the Act requires that a franchisor deliver to a prospective franchisee a disclosure document, prepared in compliance with the Act and the Regulation prior to the payment of any money to the franchisor by the prospective franchisee or the prospective franchisee entering into any agreement relating to the franchise.
In order to meet the Act's requirements for exclusion from disclosure, the deposit payable by a prospective franchisee must:
(i) be fully refundable without any deductions;
(ii) not exceed a prescribed amount (20% of the initial franchise fee to a maximum of $100,000); and
(iii) be given under an agreement that does not bind the prospective franchisee to sign the franchise agreement.
- Other Agreements Relating to the Franchise
A franchisor's obligation to disclose prior to the signing of an agreement "relating to the franchise" does not apply to an agreement that only contains terms that:
(i) require any information or material that may be provided to a prospective franchisee to be kept confidential;
(ii) prohibit the use of any information or material that may be provided to a prospective franchisee; or
(iii) designate a location, site or territory for a prospective franchisee.
However, the exception for a confidentiality agreement does not apply to an agreement if it, among other things, prohibits the disclosure of information to an organization of franchisees, other franchisees of the same franchise system or a franchisee's professional advisors.
- Statements of Material Change
Although most franchisors have included, as a matter of course, a certificate with their statements of material change, the Act now expressly requires a certificate which is similar to the certificate required to be included with a disclosure document, certifying that the statement of material change contains no untrue information, representations or statements, and includes every material change. The signatories to the certificate are the same as those for the certificate included in a disclosure document.
- Other Changes
The other amendments to come into force on September 1, 2020 prescribe the amounts for exemption from disclosure for small and large investments, specify the period for calculating sales for purposes of the fractional franchise exemption and make certain housekeeping matters.
If you have any questions regarding these upcoming changes, please contact any member of our Franchise Law Group.