taking a ggre ssi ve a c ti on to elim inate c onti nuing vi olations of the f ra n c hise a gre e m e nt b y a n y
de fic ient f r a nc hise e s. Thi s a pproa c h
m a y be pr e se nted a s a " posi ti ve a tt ribute " of the fr a n c hisor
to prospe c ti ve fr a nc hise e s, a nd a s a r e sult , man y fr a nc hisee s man y h e a r a bo ut fr a nc hisor ini ti a ted
law suit s e ve n if sa id l it igation i s not disclosed in t he UF OC.
As a le g a l conside ra ti on, I do n
ot b e li e ve ther e sho uld be a re quir e ment f or t his par ti c ular
infor mation t o be disclosed a s thi s infor mation does not di re c tl y se rv e the pa rtic ular purp os e of
prote c ti ng th e c onsum e r i n fr a nc hise t ra nsa c ti ons, a nd, pa rtic ula rl y with l a r g e e stablis he d
fr a nc
hisors, su c h a r e quir e ment c ould s ubst a nti a ll y incr e a s e c osts for p re pa r a ti on of the ma ter ial
a nd fo r the inc re a s e d doc ument si z e that would ha ve to re sult fr om t he incl usion of this m a ter ial.
Que sti on/Topi c : S hould "g a g" ord e r a rr a n ge ment s be re g ulate d?
C
omm e nt/ R e sponse: " Ga g" ord e r a rr a n ge ments of ten f orm a ne c e ssa r y ince nti ve for fr a nc hisors
to ente r into settl e ment a g r e e ments wit h fr a nc hise e s. Ga g ord e r a rr a n ge me nts s hould not be
re g ulate d, a nd th e y shoul d c e rta inl y not be pr ohibi ted. W it h re spe c t t o fu
ll disclosure to
prospe c ti ve f ra nc hise e s, a fr a n c hisee who ha s a gr e e d to a "g a g" ord e r ma y not be pe rmitt e d to
discuss t he ter ms of his se tt leme nt or li ti g a ti on with a ne w pr osp e c ti ve f ra n c hisee , but he is not
prohibit e d fr om t e ll ing th e ne w pr osp e c ti ve f r
a nc h isee that he is s ubjec t t o the spe c ific
re strictions im pose d b y a "g a g" ord e r. I f thi s infor mation i s troubli ng to t he prospe c ti ve
fr a nc hise e , he will then p ursue it fur ther with t he r e pre se nt a ti ve s of the f ra n c hisor unti l he is
sa ti sfie d with re spe c t
to t his or a n y oth e r tr a ns a c ti ons t ha t ar e subj e c t t o "gag" o rde rs.
Que sti on/Topi c : S hould t he C omm iss ion continue pe rmitt ing a thr e e
-
y e a r p ha se
-
in of a udit e d
fina nc ials for n e w e ntr a n ts ?
C omm e nt/ R e sponse: I de finitel y be li e v e the thr e e
-
y e a r pha s e
-
in pe rio
d shoul d be c onti nue d. This
is a most e ff icie nt and f a i r me thod of pr ovidi ng fin a nc ial dis c losure a nd a c c ountabili t y for ne w
fr a nc hisors without pe na li z ing them or re strictin g the e ntre p re ne u ria l m oti va ti on that is a n
im porta nt compone nt. Ne w, e mer g in g fr a
n c hisors shoul d not be disc oura g e d sol e l y due to
fina nc ial r e porting re quir e ments a s opposed to the moni toring of f inan c ial s tabili t y it se lf.
Que sti on/Topi c : Dist ing uishi ng B usiness Oppo rtunit ies f rom f ra nc his e s?
C omm e nt/ R e sponse: I t has be e n e st a bli she d t
ha t t he re is a ge ne r a l conse ns us t ha t " B usin e ss
Oppor tuni ti e s" shoul d be dist ing uished a nd re c o gniz e d a pa rt f rom f r a nc his e s.
W it h re g a rd to pr e
-
sa l e d isclosure s re quir e d of B u siness Oppor tuni ti e s, I fe e l i t i s a pprop ria te
that a n y suppl ie r of 20 pe rc e nt or
mor e of the sta rt
-
up inventor y of a n inves tor in a B usiness
Oppor tuni t y shoul d ha ve to be disc losed pr ior to t he sa le.
As a n a lt e rn a ti ve de finiti on of a " B usiness Oppo rt unit y " , I would su gg e st t he following
de finiti on:
A B usiness Oppor tuni t y i s a volunt a r
y a r ra n g e m e n t betwe e n two pa rtie s, w he re one p a rt y (the
fir st par t y ), of fe rs the oth e r pa rt y (th e se c ond p a rt y ) pa rtic ipation i n the on
-
going busi ne ss
2
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taking a ggre ssi ve a c ti on to elim inate c onti nuing vi olations of the f ra n c hise a gre e m e nt b y a n y
de fic ient f r a nc hise e s. Thi s a pproa c h
m a y be pr e se nted a s a " posi ti ve a tt ribute " of the fr a n c hisor
to prospe c ti ve fr a nc hise e s, a nd a s a r e sult , man y fr a nc hisee s man y h e a r a bo ut fr a nc hisor ini ti a ted
law suit s e ve n if sa id l it igation i s not disclosed in t he UF OC.
As a le g a l conside ra ti on, I do n
ot b e li e ve ther e sho uld be a re quir e ment f or t his par ti c ular
infor mation t o be disclosed a s thi s infor mation does not di re c tl y se rv e the pa rtic ular purp os e of
prote c ti ng th e c onsum e r i n fr a nc hise t ra nsa c ti ons, a nd, pa rtic ula rl y with l a r g e e stablis he d
fr a nc
hisors, su c h a r e quir e ment c ould s ubst a nti a ll y incr e a s e c osts for p re pa r a ti on of the ma ter ial
a nd fo r the inc re a s e d doc ument si z e that would ha ve to re sult fr om t he incl usion of this m a ter ial.
Que sti on/Topi c : S hould "g a g" ord e r a rr a n ge ment s be re g ulate d?
C
omm e nt/ R e sponse: " Ga g" ord e r a rr a n ge ments of ten f orm a ne c e ssa r y ince nti ve for fr a nc hisors
to ente r into settl e ment a g r e e ments wit h fr a nc hise e s. Ga g ord e r a rr a n ge me nts s hould not be
re g ulate d, a nd th e y shoul d c e rta inl y not be pr ohibi ted. W it h re spe c t t o fu
ll disclosure to
prospe c ti ve f ra nc hise e s, a fr a n c hisee who ha s a gr e e d to a "g a g" ord e r ma y not be pe rmitt e d to
discuss t he ter ms of his se tt leme nt or li ti g a ti on with a ne w pr osp e c ti ve f ra n c hisee , but he is not
prohibit e d fr om t e ll ing th e ne w pr osp e c ti ve f r
a nc h isee that he is s ubjec t t o the spe c ific
re strictions im pose d b y a "g a g" ord e r. I f thi s infor mation i s troubli ng to t he prospe c ti ve
fr a nc hise e , he will then p ursue it fur ther with t he r e pre se nt a ti ve s of the f ra n c hisor unti l he is
sa ti sfie d with re spe c t
to t his or a n y oth e r tr a ns a c ti ons t ha t ar e subj e c t t o "gag" o rde rs.
Que sti on/Topi c : S hould t he C omm iss ion continue pe rmitt ing a thr e e
y e a r p ha se
in of a udit e d
fina nc ials for n e w e ntr a n ts ?
C omm e nt/ R e sponse: I de finitel y be li e v e the thr e e
-
y e a r pha s e
in pe rio
d shoul d be c onti nue d. This
is a most e ff icie nt and f a i r me thod of pr ovidi ng fin a nc ial dis c losure a nd a c c ountabili t y for ne w
fr a nc hisors without pe na li z ing them or re strictin g the e ntre p re ne u ria l m oti va ti on that is a n
im porta nt compone nt. Ne w, e mer g in g fr a
n c hisors shoul d not be disc oura g e d sol e l y due to
fina nc ial r e porting re quir e ments a s opposed to the moni toring of f inan c ial s tabili t y it se lf.
Que sti on/Topi c : Dist ing uishi ng B usiness Oppo rtunit ies f rom f ra nc his e s?
C omm e nt/ R e sponse: I t has be e n e st a bli she d t
ha t t he re is a ge ne r a l conse ns us t ha t " B usin e ss
Oppor tuni ti e s" shoul d be dist ing uished a nd re c o gniz e d a pa rt f rom f r a nc his e s.
W it h re g a rd to pr e
-
sa l e d isclosure s re quir e d of B u siness Oppor tuni ti e s, I fe e l i t i s a pprop ria te
that a n y suppl ie r of 20 pe rc e nt or
mor e of the sta rt
-
up inventor y of a n inves tor in a B usiness
Oppor tuni t y shoul d ha ve to be disc losed pr ior to t he sa le.
As a n a lt e rn a ti ve de finiti on of a " B usiness Oppo rt unit y " , I would su gg e st t he following
de finiti on:
A B usiness Oppor tuni t y i s a volunt a r
y a r ra n g e m e n t betwe e n two pa rtie s, w he re one p a rt y (the
fir st par t y ), of fe rs the oth e r pa rt y (th e se c ond p a rt y ) pa rtic ipation i n the on
going busi ne ss
2
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