As of July 1, 2007, the FTC finally conceded unequivocally that franchisors in the United States may deliver their disclosure documents electronically for FTC purposes. The FTC’s new Franchise Rule permits electronic disclosure, and the FTC’s FAQ’s on its new Rule states that: “. . .all franchisors can use electronic disclosure on July 1, 2007.” Electronic disclosure is permitted regardless of whether the franchisor is still using its UFOC, or has converted to the new franchise disclosure document (“FDD”).

As to any state disclosure requirements, these may be preempted by the federal law, E-Sign, as explained in other articles by many authors, including my article in the August 2005 Franchising World, and articles by Frederick Simmons and Lee Plave in the July 2006 Franchising World. In any event, many companies have been providing electronic disclosure, with the express approval of every state franchise examiner, for many years. (Of course, the state filings themselves must still be in paper, for the time being.) Franchisors may easily obtain permission for electronic disclosure, as part of their registration filings, amendments, or renewals. So the issue is closed, electronic disclosure is here!

How to Make Electronic Disclosure

There are rules about how one must make e-disclosure, and how the UFOC or FDD must be drafted to allow for e-disclosure. These rules derive from the new FTC Rule and from the 2003 NASAA Statement of Policy for Electronic Disclosures, and from a growing number of state statutes and regulations, including for example the recent California electronic disclosure amendments to its franchise disclosure law.

Franchisors must first amend their UFOC or FDD to provide near the cover page and in the receipt for possible electronic delivery. We recommend that all franchisors do so now, even if they are not intending to make use of electronic disclosure at this time. It is easy and inexpensive, and these changes have been accepted by all registration states. Many franchisors prefer to use personal paper delivery for nearly all prospects, but to supplement paper delivery in appropriate circumstances, thus saving time and money for all concerned. We discuss these uses later in this article.

Under the FTC Rule, State NASAA standards, and the federal E-Sign law, a franchisor may deliver a franchise disclosure document by electronic means, or in machine readable media (such as a CD), provided that the disclosure document: (1) is delivered as a single, integrated, document or file (a non-editable format like .PDF is recommended); (2) has no extraneous content beyond what is required or permitted by law; (3) has no links to or from external documents or content; (4) is delivered in a form that enables the recipient to store, download, retrieve, maintain and print the disclosure document for future reference and; (5) conforms as to its content and format to the requirements of law. For the sole purpose of enhancing the prospective franchisee's ability to maneuver through an electronic version of a disclosure document, the franchisor may include scroll bars, internal links, and search features. All other features (e.g. multimedia tools such as audio, video, animation, or pop-up screens) are prohibited.

As to requirement (4) above, the franchisor must advise the prospective franchisee of the formats in which the disclosure document is made available, any prerequisites for obtaining the disclosure document in a particular format, and any conditions necessary for reviewing the disclosure document in a particular format. We generally do so in a separate page, after the cover pages, but before Item 1 of the disclosure. Franchisors must tailor this disclosure for the type of PC and software required, including, for example the operating system (Windows 2000, MAC, etc.), Adobe or Word, Internet connection capacity for size of attachments, CD-ROM drive, software, etc. A prospective franchisee must be cautioned that he or she has the right to receive the disclosures in paper or other format. If there is a separate tangible media, like a CD, this information must be on the CD-label or otherwise be conspicuous. If the disclosure is downloaded from a Web site, the information must be on the download instruction page.

The franchisor must also be able to prove that it delivered the disclosure document electronically in compliance with these requirements, and that it did so at or before the time required by law. In order for the disclosure document to be considered "delivered”, it must be conveyed to and received by the prospective franchisee. The receipt attached to the disclosure document must include specific instructions for returning the receipt (for example, street address, email address, facsimile telephone number). We recommend that the receipt contain alternative instructions, e.g. "If you received this FDD by email. . . ." "If you received this FDD by downloading from our Web site . . . .", etc. It is safest to request the prospect to sign a paper receipt, as well as keeping an electronic receipt.

The signature on the receipt must be a person's affirmative step to authenticate his or her identity. In addition to a person's handwritten signature, a person may use security codes, passwords, electronic signatures or other similar devices to authenticate his or her identity.

The franchisor must keep records of each version of disclosure documents and of all signed and dated receipts for the time required by state and federal law. (We recommend the longer of six years or for completed sales, the initial term of the franchise.) Franchisors must also retain, and make available to the FTC upon request, a sample copy of each materially different version of their disclosure documents for three years after the close of the fiscal year when it was last used. Since the disclosure is one integrated document, each such disclosure document should have a version number and date. It is safest to keep both paper and electronic:

1. Copies of delivery records (e.g. emails, CD transmittals, Web access records, etc.)

2. Original Receipts

3. Copies of each version of each disclosure document delivered to each prospect.

In short, the franchisor and its counsel must tailor instructions to prospective franchisees to conform to the actual form of disclosure being used and the means of downloading and viewing it.

What Form of Electronic Disclosure to Use

1. Email. The simplest form of e-disclosure is to email a PDF (Adobe Acrobat® format) FDD to a prospect. Franchisors might use this:

A. To Speed the Sales Process: Before a “discovery day” or meeting, to speed the time of disclosure by the one to three day mailing or delivery time (in addition to delivery of a paper copy later); Or

B. To reduce printing, mailing and handling costs of multiple deliveries, e.g. to spouses, investors, lawyers, advisors, lenders, etc. (in addition to paper delivery to the franchisee); Or

C. To both speed delivery, and even further reduces costs, in lieu of paper delivery.

Many franchisors would not choose option C, because of concern that franchisees want at least one paper version, and printing such a large document might be inconvenient for them.

Disadvantages might include that the disclosure document can be easily forwarded, but most disclosures are now available quickly and electronically from states or from private service providers, so this is seldom a concern. There may also be some prospects without access to a computer capable of downloading a PDF, but this would be very rare also.

2. CD-ROM. Franchisors that deliver a CD-ROM find the following benefits and disadvantages, in addition to those for email delivery:

A. Allows delivery of unusually lengthy complex documents. For example, some hotel companies deliver CD’s with the disclosures for each of their brands, several thousands of pages.

B. Can be copy-protected, and distribution can be otherwise limited.

A disadvantage over email is that it still requires physical delivery, and so is neither as fast nor as simple as email delivery.

3. Web Page Download. This can be done from the franchisor’s Web site, or from that of a commercial service provider. Advantages and disadvantages, in addition to those for email delivery, might include:

A. Allows automated integration with contact management software.

B. Distribution is somewhat controlled by giving password access to prospects, but this is by itself no guarantee against further distribution or copying, unless copy and print protection is added, as in the other forms of e-disclosure.

A possible disadvantage is that, like a CD-ROM, this is more complicated, and if a service provider is used, more expensive, than a simple email disclosure.

Franchisors’ and Franchisees’ Experience

Prospective franchisees are responding very favorably to electronic disclosure. They can (unless copy protection prevents this), more easily share the document with their advisors, lenders and investors. They can also use search functions to analyze the agreement. They can store it permanently for later reference.
One franchisor that uses electronic delivery extensively is Butterfly Life, a fast-growing women’s fitness center concept. Tom Gergley, Chairman, states that prospective franchisees like electronic disclosure for a number of reasons, including speed, sharing the disclosure with advisors, and answering questions interactively. The interactive aspect means that the franchisor and prospective franchisee will talk on the phone while the prospect references the disclosure on his or her computer, or both will use Microsoft Live® to view the same part of the document at the same time while conferencing. The franchisor also integrates parts of the disclosure and agreement into an interactive Power Point ® presentation viewed on the prospects computer. The franchisor can easily track disclosures and versions, and a service provider integrates the system into the sales process software. Prospects always sign paper agreements and receipts, but are not disclosed with paper disclosures unless they ask.
In short, electronic disclosure is “au courant.” 

"Electronic Disclosure – The Future is Now" was published by Franchise World Magazine, October 2007.