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I. INTRODUCTION
It was almost immediately after franchising came of age in the late 1950's and the
decade of the 60's that the criminal community—including organized crime—began
perpetrating deceit and fraud on victims who believed they were investing their money
to become franchisees of legitimate businesses. Instead, those unsuspecting victims
were purchasing phantom, non-existent franchises. To eradicate that fraud and
criminality, the first franchise-specific law of any kind was enacted by the state of
California in 1971. And since that time, fourteen more states and the Federal Trade
Commission (“FTC”) have followed suit, each enacting their own franchise-specific law
requiring franchisors to prepare and disclose prospective franchisees with a franchise
disclosure document (“FDD”).
This paper focuses on the disclosure requirements of the federal FTC Franchise Rule
and the fifteen states featuring their own franchise-specific disclosure laws.1
Although
fourteen of those fifteen states also require franchisors to file an application or notice
with the state before offering or selling franchises in the state, giving them the name
“registration/disclosure states,” that registration process will not be addressed in this
paper.
(...)
FDD Item 20 seeks to impart information regarding the historic and prospective growth
or contraction of the franchise network, coupled with the current status of that network in
terms of the number of operational units. A franchisor must set forth five tables, four of
which detail the status of the subject franchise network during each of the franchisor’s
three most recent fiscal years (how many franchised and company-owned units were
open at the beginning of each year/end of each year; how many franchise transfers
were effected, on a state by state basis; how many franchised units, again on a stateby-state
basis, were terminated, not renewed, reacquired by the franchisor or ceased
operations; identical information for company-owned units) and a fifth table featuring the
franchisor’s estimate of the number of franchises it will grant on a state-by-state basis
over its coming fiscal year.
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In addition, franchise specific information is required: the names, unit addresses and
unit telephone numbers of all currently operating franchisees must be set forth in Item
20 (usually by means of an exhibit thereto) as must the names, cities, states and current
business telephone numbers (or, if unknown, the last known home telephone numbers)
of every franchisee who had an outlet terminated, cancelled, not renewed or otherwise
ceased doing business during the franchisor’s most recently completed fiscal year (or
who has not communicated with the franchisor within ten weeks of the issuance date of
the FDD). Further, if franchisees signed confidentiality agreements during the
franchisor’s last three fiscal years which restrict or preclude their ability to communicate
their experiences with prospective franchisees, this fact must be disclosed.

http://emarket.franchise.org/2013ls/Basics Disclosure Paper....