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Franchise Disclosure Laws

M. Todd Henderson, University of Chicago, Faculty of Law writes about insider trading regulation that:

"Ever since Louis Brandeis wrote that "sunlight is the best disinfectant," disclosure has been the fetish of American law.

Our securities laws and much of corporate law are premised on the assumption that disclosure is a virtual legal panacea -- if individuals are aware of the relevant information, then the opportunities for strategic opportunism will be reduced or eliminated.

For this reason, the knee-jerk response to perceived problems in nearly every area of law is increased disclosure."

As explained in USA Today disclosure of insider trading doesn't work,

"Some executives are finding the best way to stay under the radar when selling their company's stock may be to make themselves the biggest blips possible.

Newly released academic research shows that executives who voluntarily give the most detail about prearranged plans to sell stock including how many shares and a general time frame for the transactions are the ones who have had the best timing with their stock sales.

Regulators allow executives to pre-plan sales of their companies' stock in order to avoid conflict of interest when they sell.

Companies aren't required to reveal such plans.

But when they do, a new study shows, it might be a good idea to pay attention.

Is it any surprise that executive can game this system of disclosure?

Does something similar work in franchising?

Sure, and why? Because the disclosure requirements in franchising are completely formal and meaningless.

Consider what the new head of the FTC said about the new FDD, the Franchise Disclosure Document.

"BMM: No government employee is assigned to read or monitor the disclosure documents. How would you advise a prospective franchise owner to use the Franchise Disclosure Document if the accuracy of its contents is not known or overseen?

Tregillus: The FDD is designed to be a starting point for a potential purchasers evaluation of a franchise opportunity. As previously noted, the FDD includes contact information not only for franchisee associations, but also for current and former franchisees, so that any potential purchaser can confirm with them that what the franchisor says in the FDD is accurate. While the FTC does not review disclosure documents, a number of states with registration and disclosure laws do conduct such reviews.

BMM: Does the FTC plan to set up an online federal database of disclosure documents like Californias CalEasi where franchise investors can easily and freely access them as electronic files?

Tregillus: No. The Rule has never required franchisors to file copies of their disclosure documents with the FTC, and the agency only reviews a franchisors disclosures in the context of a specific law enforcement investigation.

Great, so as long as you disclose in the appropriate manner to the prospective franchisee that the deal is very bad, don't let them review the disclosure before they are hooked, and then have no regulator review the disclosure - well then according to the FTC, you are "protecting" consumers.

What nonsense.

Full post as published by Misleading Advertising Law on June 06, 2008 (boomark / email).